Tag Archive for: China

Amendment of Chinese Civil Procedure Law Concerning Foreign Affairs

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by Du Tao*/Xie Keshi

On September 1, 2023, the fifth session of the Standing Committee of the 14th National People’s Congress deliberated and adopted the Decision of the Standing Committee of the National People’s Congress on Amending the Civil Procedure Law of the People’s Republic of China, which will come into force on January 1, 2024. This amendment to the Civil Litigation Law implements the Party Central Committee’s decision and deployment on coordinating domestic rule of law and foreign-related rule of law, strengthening foreign-related rule of law construction, and among the 26 amendments involved, the fourth part of the Special Provisions on Foreign-related civil Procedure is exclusive to 19, which is the first substantive amendment to the foreign-related civil procedure since 1991.

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How to Criticize U.S. Extraterritorial Jurisdiction (Part II)

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Written by Bill Dodge, the John D. Ayer Chair in Business Law and Martin Luther King Jr. Professor of Law at UC Davis School of Law.

There are better and worse ways to criticize U.S. extraterritorial jurisdiction. In Part I of this post, I discussed some shortcomings of a February 2023 report by China’s Ministry of Foreign Affairs, “The U.S. Willful Practice of Long-arm Jurisdiction and its Perils.” I pointed out that the report’s use of the phrase “long-arm jurisdiction” confuses extraterritorial jurisdiction with personal jurisdiction. I noted that China applies its own laws extraterritorially on the same bases that it criticizes the United States for using. I argued that the report ignores significant constraints that U.S. courts impose on the extraterritorial application of U.S. laws. And I suggested that China had chosen to emphasize weak examples of U.S. extraterritoriality, such as the bribery prosecution of Frédéric Pierucci, which was not even extraterritorial.

In this post, I suggest some better ways of criticizing U.S. extraterritorial jurisdiction. Specifically, I discuss three cases in which the extraterritorial application of U.S. law appears to violate customary international law rules on jurisdiction to prescribe: (1) the indictment of Huawei executive Wanzhou Meng; (2) the application of U.S. sanctions based solely on clearing dollar transactions through U.S. banks; and (3) the application of U.S. export controls to foreign companies abroad based on “Foreign Direct Product” Rules. The Ministry of Foreign Affairs report complains a lot about U.S. sanctions, but not about the kind of sanctions that most clearly violates international law. The report says much less about export controls and nothing about Meng’s indictment, which is odd given the tensions that both have caused between China and the United States. Read more

How to Criticize U.S. Extraterritorial Jurisdiction (Part I)

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Written by Bill Dodge, the John D. Ayer Chair in Business Law and Martin Luther King Jr. Professor of Law at UC Davis School of Law.

China has been critical of U.S. extraterritorial jurisdiction. In February, China’s Ministry of Foreign Affairs issued a report entitled “The U.S. Willful Practice of Long-arm Jurisdiction and its Perils.” In the report, the Ministry complained about U.S. secondary sanctions, the discovery of evidence abroad, the Helms-Burton Act, the Foreign Corrupt Practices Act, the Global Magnitsky Human Rights Accountability Act, and the use of extraterritorial jurisdiction in criminal cases. The report claimed that U.S. extraterritorial jurisdiction has caused “severe harm … to the international political and economic order and the international rule of law.”

There are better and worse ways to criticize U.S. extraterritorial jurisdiction. The Ministry of Foreign Affairs report pursues some of the worse ways and neglects some better ones. In this post, I discuss a few of the report’s shortcoming. In a second post, I discuss stronger arguments that one could make against U.S. extraterritorial jurisdiction. Read more

International Symposium on Legalisation of Foreign Relations in China

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Legalisation of Foreign Relations in China, 14 Oct 2023, Wuhan University

Wuhan University and Fudan University are co-organising an International Symposium “Legalisation of Foreign Relations in China” (in English) on 14 Oct 2023. This symposium will discuss the two most important developments in Chinese law relating to foreign relations, i.e. the Foreign Relations Law and the Foreign State Immunities Law. Some presented articles will be published in the special session of the Chinese Journal of Transnational Law. This symposium will be held in person and online. Everyone is welcome. For more information and the program, please follow the event page. This event can be attended in-person or online. No registration is required.

INTERNATIONAL SYMPOSIUM ON LEGALISATION OF FOREIGN RELATIONS IN CHINA
Time: 9:30 am (Beijing time), 14 Oct 2023

Join the Zoom meeting
https://zoom.us/j/87645264148?pwd=xlbP90sgAmV0R4kFT6nkmxbL5nVlHA.1

Meeting ID: 876 4526 4148
Password: 032908

China’s Draft Law on Foreign State Immunity—Part II

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Written by Bill Dodge, the John D. Ayer Chair in Business Law and Martin Luther King Jr. Professor of Law at UC Davis School of Law.

In December 2022, Chinese lawmakers published a draft law on foreign state immunity, an English translation of which is now available. In a prior post, I looked at the draft law’s provisions on immunity from suit. I explained that the law would adopt the restrictive theory of foreign state immunity, bringing China’s position into alignment with most other countries.

In this post, I examine other important provisions of the draft law, including immunity from attachment and execution, service of process, default judgments, and foreign official immunity. These provisions generally follow the U.N. Convention on Jurisdictional Immunities of States and Their Property, which China signed in 2005 but has not yet ratified.

China’s draft provisions on immunity from attachment and execution, service of process, and default judgments make sense. Applying the draft law to foreign officials, however, may have the effect of limiting the immunity that such officials would otherwise enjoy under customary international law. This is probably not what China intends, and lawmakers may wish to revisit those provisions before the law is finally adopted. Read more

China’s Draft Law on Foreign State Immunity Would Adopt Restrictive Theory

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Written by Bill Dodge, the John D. Ayer Chair in Business Law and Martin Luther King Jr. Professor of Law at UC Davis School of Law.

On the question of foreign state immunity, the world was long divided between countries that adhere to an absolute theory and those that adopted a restrictive theory. Under the absolute theory, states are absolutely immune from suit in the courts of other states. Under the restrictive theory, states are immune from suits based on their governmental acts (acta jure imperii) but not from suits based on their non-governmental acts (acta jure gestionis).

During the twentieth century, many countries adopted the restrictive theory. (Pierre-Hugues Verdier and Erik Voeten have a useful list of the dates on which countries switched on the last page of this article.) Russia and China were the most prominent holdouts. Russia joined the restrictive immunity camp in 2016 when its law on the jurisdictional immunity of foreign states went into effect. That left China. In December 2022, Chinese lawmakers published a draft law on foreign state immunity, an English translation of which has recently become available. If adopted, this law would move China to into the restrictive immunity camp as well.

China’s draft law on foreign state immunity has important implications for other states, which would now be subject to suit in China on a range of claims from which they were previously immune. The law also contains a reciprocity clause in Article 20, under which Chinese courts may decline to recognize the immunity of a foreign state if the foreign state would not recognize China’s immunity in the same circumstances. Chinese courts could hear expropriation or terrorism claims against the United States, for example, because the U.S. Foreign Sovereign Immunities Act (FSIA) has exceptions for expropriation and terrorism.

In this post, the first of two, I look at the draft law’s provisions on foreign state immunity from suit from a U.S. perspective. In the second post, I will examine the law’s provisions on the immunity of a foreign state’s property from attachment and execution, its provisions on service and default judgments, and its potential effect on the immunity of foreign officials. Read more

Chinese Court Enforces Singaporean Judgment based on De Jure Reciprocity

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By Zheng Sophia Tang, Wuhan University Institute of International Law and Academy of International Law and Global Governance

 

Chinese courts recognize and enforce foreign civil and commercial judgments under two circumstances: the existence of treaty obligations and the existence of reciprocity. In the past, Chinese courts relied solely on de facto reciprocity to enforce foreign judgments, which requires evidence to prove the courts in the foreign country enforced Chinese judgments in previous cases. Some courts have adopted an even tougher approach and rejected enforcing foreign judgments even though one positive precedent exists in the foreign country, arguing one case is not enough to prove reciprocity. The application of de facto reciprocity causes difficulty to enforce foreign judgments in Chinese courts. It makes enforcement impossible if no application was made to the foreign court to enforce Chinese judgment in the past, and if the other country also adopts the de facto reciprocity. It also makes proving reciprocity difficulty, especially if the foreign country has no comprehensive case report system.

After China commenced the One-Belt-One-Road initiative, efforts were made to relax the threshold to prove reciprocity. The Supreme Court has proposed, in two OBOR opinions, that China should adopt a presumed reciprocity approach, which presumes reciprocity exists if the other country demonstrates intention to establish judicial cooperation with China and no negative precedence exists.[1] However, since these opinions are not legally binding, they are not enough to reverse court practice. Although more Chinese courts enforce foreign judgments after 2013, they still need the proof of one positive case in the foreign country.

20 July, 2021, Shanghai No 1 Intermediate Court decided to recognize and enforce the Singaporean monetary judgment.[2] Although de facto reciprocity already exists between China and Singapore and Chinese courts enforced Singaporean judgments based on de facto reciprocity in the past,[3] this case justifies the decision based on de jure reciprocity. The judgment states: “The reciprocal relationship exists between China and Singapore, because Chinese judgments can be recognized and enforced in Singapore under the same conditions. On the other hand, Singaporean High Court recognized and enforced Chinese judgments in the past, and precedents to recognize and enforce Singaporean judgments also exist in Chinese courts. It shows de facto reciprocal relationship also exists between China and Singapore.”

It is clear that this judgment discusses both de facto and de jure reciprocity. The court considers whether Chinese judgments may be recognized and enforced in Singapore as a matter of law. However, proving de jure reciprocity is not easy. Unless the foreign law completely prohibits enforcing foreign judgments in the absence of treaty obligations, most law will provide conditions for foreign judgments enforcement. The conditions would allow foreign judgments enforced in certain circumstances and not others. In other words, no law would say foreign judgments can be recognized in all circumstances. How to assess if these conditions are enough to make enforcement possible in law? What if the foreign law provides different conditions to enforce foreign judgments from Chinese law? What if the foreign law require de facto reciprocity and China has not yet enforced judgments from this country, rendering enforcement of Chinese judgments practically impossible in the foreign court?

The Shanghai court adopts the equivalent condition test. It takes the seat of Singaporean court and imagine what may happen if this application is a Chinese judgment seeking Singaporean enforcement. It concludes that as far as Singaporean court can enforce Chinese judgments under the same condition, de jure reciprocity exists. In other words, it applies the Singaporean standard to assess enforceability of this judgment. The problem is it may lead to the result that between two countries de jure reciprocity exits in some cases but not others. As reciprocity refers to the relationship between two countries, it should be a systematic status, and not variable according to the different fact of a case.

Another difficulty is that it is usually hard for Chinese courts to know exactly how judicial decision of a foreign court may be made, especially how judicial discretion is going to be exercised in a foreign country. The assessment of the potential enforceability of Chinese judgments in the foreign court in the same condition can only be based on black-letter law which may not be so precise to test de jure reciprocity. Of course, it is arguable that de jure reciprocity only needs a general possibility for a foreign court to enforce Chinese judgments, but not specific Chinese judgments are definitely enforceable in the foreign country. If so, the equivalent condition test is not appropriate to assess de jure reciprocity.

One may suggest the legal comparability test. It argues that de jure reciprocity depends on whether the foreign law provide legally comparable conditions for FJR as Chinese law. This suggestion is also problematic, because many countries’ law provide much lower threshold to enforce foreign law than Chinese law. For example, they do not require reciprocity as a pre-condition. These laws are not comparable to Chinese law, but it is hard to argue that Chinese judgments cannot be enforced in those countries as a matter of law.

The third suggestion is the no higher threshold test. It suggests that if the foreign law does not make it more difficult to enforce Chinese judgments, de jure reciprocity exists. However, what if the foreign law adopts de facto reciprocity like most Chinese courts do in practice? Can we argue the foreign law provide higher threashold because one Chinese court uses de jure reciprocity? Or we consider these two laws provide simialr threshold and treat de jure reciprocity exists, even though the foreign court actually cannot enforce Chinese judgments because Chinese courts did not enforce judgments from this country before?

Anyway, although the test for de jure reciprocity is not settled, the Shanghai judgment shows a laudable progress. This is the first case that de jure reciprocity has been applied in a Chinese court. It shows a serious attempt to deviate from de facto reciprocity. Of course, since de facto reciprocity also exists between China and Singapore, this judgment does not bring significant difference in result. It is curious to see whether the Chinese court will apply de jure reciprocity alone to enforce foreign judgments in the future, and whether any new tests for de jure reciprocity may be proposed in the future judgments.

 

[1] Several Opinions of the Supreme People’s Court Concerning Judicial Services and Protection Provided by People’s Courts for the Belt and Road Initiative], [2015] Fa Fa No. 9, para 6; The Opinions of the SPC Regarding the People’s Court’s Further Provision of Judicial Services and Guarantees for the Construction of the Belt and Road, Fa Fa [2019] 29, para 24.

[2] (2019) Hu 01 Xie Wai Ren No 22.

[3] Singaporean case, Giant Light Metal Technology (Kunshan) Co Ltd v Aksa Far East Pte ltd [2014] 2 SLR 545; Chinese case, Kolmar Group AG v. Jiangsu Textile Industry Import and Export Corporation, (2016) Su 01 Xie Wai Ren No 3.

Virtual Hearing in China’s Smart Court

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By Zheng Sophia Tang, Wuhan University (China) and Newcastle University (UK)

Mr Ting Liao, PhD candidate at the Wuhan University Institute of International Law, published a note on the Chinese Smart Court, which attracted a lot of interest and attention. We have responded a few enquires and comments, some relating to the procedure and feasibility of virtual/remote hearing. Based on the questions we have received, this note provides more details on how the virtual hearing is conducted in China.

  1. Background

The fast development of virtual hearing and its wide use in practice in China are attributed to the Covid-19 pandemic. The pandemic causes serious disruption to litigation. China is a country that has adopted the toughest prevention and controlling measures. Entrance restriction, lockdown, quarantine and social distancing challenge the court process and case management. In the meantime, this challenge offers the Chinese courts a chance to reform and modernize their judicial systems by utilizing modern technology. Since suspending limitation period may lead to backlog and delay, more Chinese courts favour the virtual proceedings. This strategy improves judicial efficiency and helps parties’ access to justice in the unusual circumstances.

Before the pandemic, Chinese courts have already started their exploration of online proceedings. In 2015, the Provisions of the SPC on Several Issues Concerning Registration and Filling of Cases provides the People’s courts should provide litigation services including online filing.[1] In the same year, the SPC published the Civil Procedural Law Interpretation, which states that the parties can make agreement on the form of hearing, including virtual hearing utilizing visual and audio transfer technology. The parties can make application and the court can decide whether to approve.[2] Although online trial from filing to hearing is permitted by law, but it was rarely used in practice due to the tradition and social psychology. The adoption of virtual proceedings for cases with large value was even rarer. The relevant procedure and technology were also taking time to progress and maturase.

Because the pandemic and the controlling measures make serious disruption to traditional form of litigation, online trial becomes more frequently used and develops to a more advanced stage. The SPC provids macro policy instructions that Chinese courts should actively utilize online litigation platform, such as China Movable Micro Court, which allows the parties to conduct litigation through mobile, and Litigation Service Website to carry out comprehensive online litigation activities, including filing, mediation, evidence exchange, hearing, judgment, and service of procedure.[3] While more administrative and technological efforts have been put in, and the pandemic made no better alternatives, more trials were done online. For example, between Feb and Nov 2020, 959 hearings (16.42%) and 5020 mediations were carried out online in the Qianhai Court. Between Feb and July 2020, courts in Beijing conducted average 1,300-1,500 virtual hearings per day.

Some important cases were also tried online. For example, Boa Barges As v Nanjing Yichun Shipbuilding concerned a dispute worth nearly $50,000,000.[4] The contract originally included a clause to resolve disputes in London Court of International Arbitration (LCIA) and to apply English law. However, the pandemic outbroke in the UK in March 2020. The parties entered into a supplementary agreement in May 2020 to submit the dispute to Nanjing Maritime Court and apply Chinese law. Chinese commentators believe the change of chosen forum and governing law demonstrates the parties’ trust on Chinese international judicial system and courts’ capacity. Nanjing Maritime Court followed the SPC instruction by allowing the foreign party to postpone submitting authorization notarization and authentication, and conducted online mediation. In China, mediation is part of the formal litigation procedure. The parties settled by mediation within 27 days.

In 2021, the SPC published the Online Litigation Regulations for the People’s Courts, including detailed rules for how online litigation should be conducted.[5] This Regulations provides five principles for online litigation, including fairness and efficiency, freedom of choice, protection of rights, convenience and security.[6] This Regulations provides further clarification of certain key procedural issues and provide unified micro-guidance which helps the local courts to operate in the same standards and according to the same rule.

  1. Initiation of virtual hearing

Virtual proceedings may lead to several controversies. Firstly, how are the virtual proceedings initiated? Could the court propose by its own motive, or should the parties reach agreement? What if a physical trial is not possible due to the pandemic control, both the court and the claimant want a virtual trial, but the defendant refuse to consent? In such a case, would a virtual trial in the absence of the defendant an infringement of the defendant’s due process right and should not be enforced abroad? What if the defendant and the court agree to go ahead with a virtual trial, but the claimant refuses? Would a default judgment in the absence of the claimant infringe the claimant’s due process right?

The Online Litigation Regulations provides clear guidance. Online litigation should follow the principle of freedom of choice. In other words, parties should give consent to the online procedure and cannot be forced by the court.[7] If a party voluntarily chooses online litigation, the court can conduct litigation procedure online. If all the parties agree on online litigation, the relevant procedure can be conducted online. If some parties agree on online litigation while others not, the court can conduct the procedure half online for parties who give consent and half offline for other parties.[8] However, what if a party cannot physically participate in the offline litigation because of the pandemic, and this party also refuses online litigation? This party certainly can apply for suspension or postponement of procedure. However, if this party has no legitimate reason to refuse online litigation like technical problems or the lack of computer literacy, would not the court consider such a refusal unreasonable? Does it mean a person may use the refusal rights to delay otherwise legitimate procedure to the detriment of the other party? Would the refusal turn to be a torpedo action? Does this strict autonomy approach meet the purpose of good faith and judicial efficiency? Although the freedom of choice is important, would it necessary to provide some flexibility by allowing the court to assess special circumstances of a case? It seems that this strict consent condition is based on the traditional attitude against online litigation. This attitude makes offline litigation a priority and online litigation an exception, which will only be used by parties’ choice. This approach does not provide online litigation true equal footing as offline litigation, and still reflect the social psychological concern over the use of modern technology in the court room. Although the pandemic speed the development of online litigation in China, it is treated as an exceptional emergency measure and the emphasis on it may fade away gradually after the pandemic is ending, unless the social psychology is also changed after a longer period of successful use of online litigation.

  1. Public hearing

Would virtual hearing satisfy the standard of public hearing? Certainly, there is no legal restriction preventing public access to the hearing.[9] Furthermore, the Online Litigation Regulations provides that online litigation must be made public pursuant to law and judicial interpretation, unless the case concerns national security, state secrets, individual privacy, or the case concerns a minor, commercial secrets and divorce where the parties apply for the hearing not be made public.[10] However, how to make online hearing public is a technical question. If the virtual hearing is organised online, without an openly published “link”, no public will be able to access the virtual court room and the trial is “secret” as a matter of fact. This may practically evade the public hearing requirement.

Chinese online litigation has taken into account the public hearing requirement. Both SPC litigation service website and the Movable Micro Court make open hearing an integral part of the platform. The public can register and create an account for free to log in the platform. After log in, the public can find all available services in the webpage, including Hearing Livestream. After click in, the pubic can find the case that they want to watch by searching the court or browse the “Live Courtroom Today”. There are also recorded hearing for the public to watch. In contrast to traditional hearing, the only extra requirement for the public to access to the court is registration, which requires the verification of ID through triple security check: uploading the scan/photo of an ID card, verifying the mobile number via security code and facial recognition.

It shows that Chinese virtual hearing has been developed to a mature stage, which meets the requirement of due process protection and public hearing. Chinese virtue hearing has been systematically updated with the quick equipment of modern technologies and well-established online platform. This platform is made available to the local courts to use through the institutional power of the centre. Virtual hearing in China, thus, will not cause challenge in terms of public hearing.

  1. Evidence

Although blockchain technology can prove the authenticity of digital evidence, many original evidence exists offline. The parties need to upload an electronic copy of those evidence through the “Exchange evidence and cross-examination” session of the smart court platform, and other parties can raise queries and challenges. During trial, the litigation parties display the original evidence to the court and other parties through the video camera. If the court and other parties raise no challenges in the pre-trial online cross-examination stage and in the hearing, the evidence may be admitted. It, of course, raises issues of credibility, because electronic copy may be tempered with and the image displayed by video may not be clear and cannot be touched, smelled and felt for a proper evaluation. Courts may adopt other measures to tackle this problem. For example, some courts require original evidence to be posted to the court if the court and other parties are not satisfied of the distance examination of evidence. Other courts may organise offline cross-examination of the evidence by convening a pre-trial meeting. However, in doing so, the value of the online trial will be reduced, making the trial process lengthier and more inefficient.

The practical difficulty also exists in witness sequestration. Article 74 of the “Several Provisions of the Supreme People’s Court on Evidence in Civil Litigations” provides witnesses in civil proceedings shall not be in court during other witnesses’ testimony, so they cannot hear what other witnesses say.[11] This is a measure to prevent fabrication, collusion, contamination and inaccuracy. However, in virtual hearings, it is difficult for judges to completely avoid witnesses from listening to other witnesses’ testimony online. There is no proper institutional and technical measure to address this problem and it remains one of the fallbacks in the virtual litigation.

 

 

[1] Provisions of the SPC on Several Issues Concerning Registration and Filling of Cases, Fa Shi [2015] No8, Art 14.

[2] The SPC Interpretation of the Application of the PRC Civil Procedure Law, Art 295.

[3] Notice of the SPC about Strengthening and Regulating Online Litigation during the Prevention and Controlling of the Covid-19 Pandemic, Fa [2020] 49, Art 1.

[4] The Supreme People’s Court issued the sixth of ten typical cases of national maritime trials in 2020: BOABARGESAS v Nanjing Yichun Shipbuilding Co., Ltd. Ship.

[5] SPC, Online Litigation Regulations for the People’s Court, Fa Shi [2021] No 12.

[6] Art 2.

[7] Art 2(2).

[8] Art 4.

[10] Art 27.

[11] Fa Shi [2019] 19.

Tort Choice of Law Rules in Cross-border Multi-party Litigation under European and Chinese Private International Law

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Tort Choice of Law Rules in Cross-border Multi-party Litigation under European and Chinese Private International Law Read more

Red-chip enterprises’ overseas listing: Securities regulation and conflict of laws

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Written by Jingru Wang, Wuhan University Institute of International Law

 

1.Background

Three days after its low-key listing in the US on 30 June 2021, Didi Chuxing (hereinafter “Didi”) was investigated by the Cyberspace Administration of China (hereinafter “CAC”) based on the Chinese National Security Law and Measures for Cybersecurity Review.[1] Didi Chuxing as well as 25 Didi-related APPs were then banned for seriously violating laws around collecting and using personal information,[2] leading to the plummet of Didi’s share. On 16 July 2021, the CAC, along with other six government authorities, began an on-site cybersecurity inspection of Didi.[3] The CAC swiftly issued the draft rules of Measures for Cybersecurity Review and opened for public consultation.[4] It proposed that any company with data of more than one million users must seek the Office of Cybersecurity Review’s approval before listing its shares overseas. It also proposed companies must submit IPO materials to the Office of Cybersecurity Review for review ahead of listing.

It is a touchy subject. Didi Chuxing is a Beijing-based vehicle for hire company. Its core business bases on the accumulation of mass data which include personal and traffic information. The accumulated data not only forms Didi’s unique advantage but also is the focus of supervision. The real concern lays in the possible disclosure of relevant operational and financial information at the request of US securities laws and regulations, which may cause data leakage and threaten national security. Therefore, China is much alert to information-based companies trying to list overseas.

The overseas listing of China-related companies has triggered regulatory conflicts long ago. The Didi event only shows the tip of an iceberg. This note will focus on two issues: (1) China’s supervision of red-chip companies’ overseas listing; (2) the conflicts between the US’s demand for disclosure and China’s refusal against the US’s extraterritorial jurisdiction.

 

2. Chinese supervision on red-chip companies’ overseas listing

A red-chip company does most of its business in China, while it is incorporated outside mainland China and listed on the foreign stock exchange (such as New York Stock Exchange). Therefore, it is expected to maintain the filing and reporting requirements of the foreign exchange. This makes them an important outlet for foreign investors who wish to participate in the rapid growth of the Chinese economy. When asking Chinese supervision on red-chip companies listed overseas, such as Didi, the foremost question is whether the Chinese regulatory authority’s approval is required for them to launch their shares overseas. It is uneasy to conclude.

One reference is the Chinese Securities Law. Article 238 of the original version of the Chinese Securities Law provides that “domestic enterprises issuing securities overseas directly or indirectly or listing their securities overseas shall obtain approval from the securities regulatory authority of the State Council following the relevant provisions of the State Council.” This provision was amended in 2019. The current version (Art. 224 of the Chinese Securities Law) only requires the domestic enterprises to comply with the relevant provisions of the State Council. The amendment indicated that China has adopted a more flexible approach to addressing overseas listing. Literally, the securities regulatory authority’s approval is no longer a prerequisite for domestic enterprises to issue securities overseas.

When it comes to Didi’s listing in the US, a preliminary question is the applicability of such provision. Art. 224 is applied to “domestic enterprise” only. China adopts the doctrine of incorporation to ascertain company’s nationality.[5] According to Article 191 of the Chinese Company Law, companies established outside China under the provisions of foreign law are regarded as foreign companies. Didi Global Inc. is incorporated in the state of Cayman Islands, and a foreign company under the Chinese law. In analogy, Alibaba Group Holding Ltd., another representative red-chip enterprise, had not obtained and not been required to apply for approval of the Chinese competent authority before its overseas listing in 2014. A Report published by the Chinese State Administration of Foreign Exchange specifically pointed out that “domestic enterprises” were limited to legal persons registered in mainland China, which excluded Alibaba Group Holding Ltd., a Cayman Islands-based company with a Chinese background.[6]

In summary, it is fair to say that preliminary control over red-chip enterprise’s overseas listing leaves a loophole, which is partly due to China’s changing policy. That’s the reason why Didi has not been accused of violating the Chinese Securities Law but was banned for illegal accumulation of personal information, a circumvent strategy to avoid the possible information leakage brought by Didi’s public listing. Theoretically, depends on the interpretation of the aforementioned rules, the Chinese regulatory authority may have the jurisdiction to demand preliminary approval. Based on the current situation, China intends to fill the gap and is more likely to strengthen the control especially in the field concerning data security.

 

3. The conflict between the US’s demand for audit and China’s refusal against the US’s extraterritorial jurisdiction

Another problem is the conflict of supervision. In 2002, the US promulgated the Sarbanes-Oxley Act, under which the Public Company Accounting Oversight Board (hereinafter “PCAOB”) was established to oversee the audit of public companies. Under the Sarbanes-Oxley Act, wherever its place of registration is, a public accounting firm preparing or issuing, or participating in the preparation or issuance of, any audit report concerning any issuer, shall register in the PCAOB and accept the periodic inspection.[7] The PCAOB is empowered to investigate, penalize and sanction the accounting firm and individual that violate the Sarbanes-Oxley Act, the rules of the PCAOB, the provisions of the securities laws relating to the preparation and issuance of audit reports and the obligations and liabilities of accountants. Opposed to this provision (although not intentionally), Article 177 of the Chinese Securities Law forbids foreign securities regulatory authorities directly taking evidence in China. It further stipulates that no organization or individual may arbitrarily provide documents and materials relating to securities business activities to overseas parties without the consent of the securities regulatory authority of the State Council and the relevant State Council departments. Therefore, the conflict appears as the US requests an audit while China refused the jurisdiction of PCAOB over Chinese accountant companies.

It is suspected that despite the PCAOB’s inofficial characteristic, information (including the sensitive one) gathered by the PCAOB may be made available to government agencies, which may threaten the national security of China.[8] Consequently, China prevents the PCAOB’s inspection and some of Chinese public accounting firm’s application for registration in the PCAOB has been suspended.[9] In 2013, the PCAOB signed a Memorandum of Understanding with Chinese securities regulators that would enable the PCAOB under certain circumstances to obtain audit work papers of China-based audit firms. However, the Memorandum seems to be insufficient to satisfy the PCAOB’s requirement for supervision. The PCAOB complained that “we remain concerned about our lack of access in China and will continue to pursue available options to support the interests of investors and the public interest through the preparation of informative, accurate, and independent audit reports.”[10] After the exposure of Luckin Coffee’s accounting fraud scandal, the US promulgated the Holding Foreign Companies Accountable Act in 2020. This act requires certain issuers of securities to establish that they are not owned or controlled by a foreign government. Specifically, an issuer must make this certification if the PCAOB is unable to audit specified reports because the issuer has retained a foreign public accounting firm not subject to inspection by the PCAOB. If the PCAOB is unable to inspect the issuer’s public accounting firm for three consecutive years, the issuer’s securities are banned from trade on a national exchange or through other methods.

China has made “national security” its core interest and is very prudent in opening audit for foreign supervisors. From the perspective of the US, however, it is necessary to strengthen financial supervision over the public listing. As a result, Chinese enterprises have to make a choice between disappointing the PCAOB and undertaking domestic penalties. Under dual pressure of China and the US, sometimes Chinese companies involuntarily resort to delisting. This may not be a result China or the US long to see. In this situation, cooperation is a better way out.

 

4. Conclusion

China’s upgrading of its cybersecurity review regulation is not aimed at burning down the whole house. Overseas listing serves China’s interest by opening up channels for Chinese companies to raise funds from the international capital market, and thus contribute to the Chinese economy. The current event may be read as a sign that China is making provisions to strengthen supervision on red-chip companies’ overseas listing. It was suggested that the regulatory authority may establish a classified negative list. Enterprises concerning restricted matters must obtain the consent of the competent authority and securities regulatory authority before listing.[11] It is not bad news for foreign investors because the listed companies will undertake more stringent screening, which helps to build up an orderly securities market.

 

 

 

[1] http://www.cac.gov.cn/2021-07/02/c_1626811521011934.htm

[2] http://www.cac.gov.cn/2021-07/04/c_1627016782176163.htm; http://www.cac.gov.cn/2021-07/09/c_1627415870012872.htm.

[3] http://www.cac.gov.cn/2021-07/16/c_1628023601191804.htm.

[4] Notice of Cyberspace Administration of China on Seeking Public Comments on the Cybersecurity Review Measures (Draft Revision for Comment), available at: http://www.cac.gov.cn/2021-07/10/c_1627503724456684.htm

[5] The real seat theory is recommended by commentators, but not accepted by law. Lengjing, Going beyond audit disputes: What is the solution to the crisis of China Concept Stocks?, Strategies, Volume 1, 2021, p. 193.

[6] 2014 Cross-border capital flow monitoring report of the People’s Republic of China, available at: http://www.gov.cn/xinwen/site1/20150216/43231424054959763.pdf

[7] Sarbanes-Oxley Act, §102(a), §104 (a) & (b).

[8] Sarbanes-Oxley Act, §105 (b)(5)(B).

[9] https://pcaobus.org/Registration/Firms/Documents/Applicants.pdf

[10] China-Related Access Challenges, available at: https://pcaobus.org/oversight/international/china-related-access-challenges.

[11] https://opinion.caixin.com/2021-07-09/101737896.html.