By Robert J. Allan, Esq.

& Julia Zhu, Esq.

Alpha & Leader U.S. 

Since 2004, it has been reported that 96 products made in China have been recalled according to the Consumer Product Safety Commission.¹Â 

The recent outbreak this summer of lead contamination in toys produced in China has prompted U.S. importers to take steps to protect themselves from product liability claims and economic loss. 

Public statements by recent U.S. delegations to China seem to suggest the Chinese Central Government can agree to comply with international, European, or U.S. quality standards and Beijing can wave a magic wand over the vast expanse of the Chinese manufacturing landscape and have them meet those standards.  This is not realistic.    

The Chinese government has made some efforts to respond to the health concerns arising from high-profile incidents involving dangerous food and health products imported from China. For example, in October of 2007, the central government arrested 774 people allegedly involved in the sale and manufacture of counterfeit and low-quality food and drugs.² However, even though China has a strong central government, there exist significant disparities among provincial and municipal governments’ willingness and ability to enforce national laws and regulations. Some local governments are more efficient, disciplined, transparent, accountable, and have a rule-based mentality.  Other local governments do not have some or all of these characteristics.   

Overriding all of these practical issues is the fact that strict regulation, oversight and enforcement of national quality standards will cause many less competitive Chinese manufacturing facilities, especially state owned enterprises, to shut down. The resultant loss of jobs could lead to social unrest, which is politically unacceptable to the central Chinese government.  

Therefore, solutions to the problems arising from importing goods from Asia in general and China in particular will not come from the government of China without significant assistance from and insistence by U.S. importers.  

In order to deal with the event that an importer of defective Chinese goods will be sued in the U.S., the reasonable and usual first step is to seek indemnification from the Chinese manufacturer/exporter of the goods and include an indemnification clause in the contract. Although it is possible to seek indemnity from a Chinese manufacturer it is unwise to rely on any arbitration award or judgment being obtained or enforced in China. In any event, Chinese manufacturers typically are unwilling to enter into an indemnification agreement and lack product liability insurance.  

Even if an indemnity agreement is obtained from a Chinese manufacturer, enforcing the agreement is very difficult. Service on or notice to a Chinese corporate entity can be extremely difficult.  Typically there are many layers of shell companies and the structure of a corporate entity is constantly changing.   If written notice that complies with the contract is actually reached by the Chinese entity it is commonly returned to the sender marked “addressee not found” simply because a Chinese entity usually has the assistance of the local government to help it avoid being validly served. If U.S. importers can successfully serve process on a Chinese company, the company will probably challenge the jurisdiction of the U.S. court and will assert defenses such as forum non conveniens, or in the case of a Chinese state-owned entity, foreign sovereign immunity. ³Â 

Even if the U.S. court determines it has jurisdiction and the importer prevails on its indemnification claim, a U.S. money judgment will be virtually worthless if the Chinese company does not have exigible assets located outside of China.  Chinese courts have no jurisdiction or authority to enforce judgments obtained in U.S. courts because currently no international treaty exists between the U.S. and China to enforce each other’s court judgments.  

However, the issue of reciprocal enforcement of judgments in China and the U.S. may soon be resolved.  On July 14, 2006, the Special Administrative Region of Hong Kong and The People’s Republic of China signed a ground-breaking agreement, entitled “An Arrangement on Reciprocal Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region pursuant to Choice of Court Agreements between Parties Concerned” (the “Arrangement”), under which they agreed to recognize and enforce judgments made in each others courts.  The Agreement, when implemented, will give U.S. importers access to the Hong Kong common law judicial system modeled on English common law, and a direct right of enforcement of judgments in China where the defendant manufacturer’s assets are located. Legislation is currently being considered to implement the Arrangement. ⁴ 

Chinese courts are generally obligated to enforce foreign arbitral awards, and to attach domestic assets in satisfaction of such awards, pursuant to China’s treaty obligation under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Therefore, it is easier and faster to collect an arbitration award in China than it is to collect on a foreign court’s judgment in China. Most arbitration clauses with Chinese entities require arbitration under the rules of the China International Economic and Trade Arbitration Commission (CIETAC) and the Hong Kong International Arbitration Centre (HKIAC)⁵ although there are over 180 arbitrators available in Hong Kong and China.  However, U.S. importers should be aware that China has special rules that must be strictly adhered to in order to ensure the enforcement of an arbitration award in China.  

Another safeguard available to U.S. importers is to require the Chinese supplier to obtain and maintain adequate product liability insurance with a reputable U.S. or international insurance carrier. Unlike their U.S. counterparts, Chinese manufacturers do not typically buy product liability insurance and will only acquire insurance if they are contractually required to do so.  U.S. importers are often mislead by the Chinese manufacturers regarding the availability of product liability insurance. There are some top-rated global insurance companies with branch offices in China which provide export product liability insurance policies including AIG, Lloyds of London, Chubb, Winterthur and CM Finance.⁶  

However, even the most comprehensive policy of insurance will not restore a company’s reputation in the event a defective product causes consumer injuries.  

Therefore, the best strategy U.S. importers can implement to protect both their financial interests and their goodwill is to prevent defective products from entering the U.S. marketplace.  To implement this strategy we recommend a U.S. importer of Chinese goods take control of the manufacturing and importing processes by: 

First, know every supplier in the manufacturing/supply chain. The separation between the U.S. importer and the factory manufacturing the goods is often several layers deep. It is critical for the U.S. importer to verify exactly with whom they are dealing and to only work with qualified Chinese outsourcing partners.  

Second, provide training and manuals for all suppliers, employees and third party suppliers on relevant U.S. laws and regulations and quality standards for the products they manufacture.  

Third, station quality control inspectors on the supplier’s factory floor, or retain third-party inspectors based in China to review and approve the quality and safety of Chinese goods before they are exported. ⁷  

Fourth, establish good working relations with local officials. There are many governmental authorities legally empowered to supervise and control the production of goods in China, such as the General Administration of Quality Supervision, Inspection and Quarantine,⁸ State Food & Drug Administration; ⁹ China Customs,¹⁰ Ministry of Commerce,¹¹ and the State Administration for Industry & Commerce. ¹² In addition subsidiaries of these central government authorities at both the province and city levels actually supervise and control the production of goods by manufacturers in their jurisdictions. U.S. importers should work closely with, encourage and publicize the work the local governments do to supervise and control the quality of goods manufactured in China for export.  This proactive co-operative approach gives the local governments the incentive they need to actively ensure the quality of goods manufactured for export.  

Fifth, work with foreign-owned and/or controlled manufacturers in China. By working with them, U.S. importers will get the skills, talent, communication and quality of goods they receive in the U.S. Foreign owned and/or controlled manufacturers are able to manage production in a way that makes sense to the U.S. importers and greatly enhances the chance that the goods will meet the standards and quality required by U.S. importers.  

Sixth, sign up for an information-sharing rapid alert system on dangerous products manufactured in China to ensure early discovery of defective products thereby minimizing the risk to the company. 

In summary, the potential liabilities for U.S. importers of Chinese goods are huge. To minimize these risks, U.S. importers should include terms in all contracts providing for comprehensive indemnity of the importer, requiring the Chinese manufacturer/supplier to obtain product liability insurance from a rated international insurance company and a provision mandating arbitration of all disputes arising from or related to the contract. However, practically speaking the most effective way to avoid importing defective goods and the resultant damage to the importer’s goodwill and reputation is to take control of the manufacturing process to ensure the safety and quality of the imported goods.  

Chen Jiaxing   11/12/2007
“The transfer of the economic growth mode,” a common term we used to invoke, has been replaced by “the transfer of the economic development mode” in the report Comrade Hu Jintao, general secretary of the Communist Party of China (CPC), delivered at the 17th CPC National Congress in mid October. The shift from the word “growth” to “development” has enriched connotations of the basic category of development and indicates the nation’s adherence to the principle of “taking people first” and the resolve and confidence in pushing forward scientific development.

In this sense, the goal of average per-capita GDP set for the year 2020 in the Report to the 17th CPC National Congress indicates that the masses of people will hopefully benefit still more from the development of economy and enjoy more and more substantial outcome together practically.

CPC Publishes Key Policy Changes in Party Constitution

Editor: Yan Liang 10/26/2007

The Communist Party of China (CPC)published on Thursday its newly amended party constitution, revealing for the first time many landmark changes in its major political, economic and social guidelines and policies.

Scientific Outlook on Development, a new theoretical development of the Party in the past five years, as well as policies to boost democracy at intra-Party and government sphere and expand democracy, are enshrined in the constitution adopted by the CPC national congress on Oct. 21.

The amendment is designed to reflect the latest achievement of the localization of Marxism and latest experience of the Party, and meet “objective needs” in strengthening Party building and “adapting the Party to new trends and tasks”, a spokesman of the Secretariat of the once-in-five-years congress said in an interview with Xinhua.

The amendment, guided by “the Marxism-Leninism, Mao Zedong Thought, Deng Xiaoping Theory and the important thought of the Three Represents”, embodied a series of major strategic thoughts put forward by by the CPC Central Committee since the 16th National Congress of the CPC in 2002, including the Scientific Outlook on Development”, the spokesman said.

The revisions had gone through broad discussion among Party members in order to benefit from collective wisdom, which is a democratic process inside the Party, he said.

“We’ve made proper, not major, revisions to the Party constitution,” he said, despite the following sweeping changes:

– The Scientific Outlook on Development is enshrined in the general program of the Party Constitution, which defines it as “a scientific theory that is in the same line as Marxism-Leninism, Mao Zedong Thought, Deng Xiaoping Theory and the important thought of Three Represents”.

The Outlook can also be traced in many specific chapters on economic, political, cultural and social development and Party building.

“To study and implement the Scientific Outlook on Development” becomes a major duty to the 73 million Party members and all the Party organizations, the constitution says.

— The word “harmonious” is added to the Party’s basic line. The revised version reads, “turn China into a prosperous, strong, democratic, culturally advanced and harmonious modern socialist country”.

The amendment also enshrines the building of a “harmonious socialist society” into the general program the Party constitution, adding it as a fourth part of the overall arrangements for building socialism with Chinese characteristics, besides previous economic, political and cultural development and elaborating it with a whole paragraph.

– A new paragraph started with “The CPC leads the people in developing the socialist market economy” is added into the general program of the amended Party constitution, emphasizing “it unwaveringly consolidates and develops the public sector of the economy and unswervingly encourages, supports and guides the development of the non-public sector.”

It demonstrates the “Scientific Outlook on Development” as saying “the Party works to balance urban and rural development, development among regions, economic and social development, relations between man and nature, and domestic development and opening to the outside world, adjust the economic structure, and transform the pattern of economic development”.

“It is dedicated to building a new socialist countryside, taking a new path of industrialization with Chinese characteristics, and making China an innovative country and a resource-conserving, environment-friendly society,” reads the amendment.

— In the paragraph of promoting socialist democracy, the Party “respects and safeguards human rights. It (CPC) encourages the free airing of views and works to establish sound systems and procedures of democratic election, decision-making, administration and oversight,” and the Party upholds “the system of self-governance at the primary level of society” are newly added.

— “The Party helps ethnic minorities and ethnic autonomous areas with their economic, cultural and social development, and ensures that all ethnic groups work together for common prosperity and development” is added into the amended version.

“The Party strives to fully implement its basic principle for work related to religious affairs, and rally religious believers in making contributions to economic and social development” is forthe first time included in the Party constitution.

“All builders of the cause of socialism” is added as part of the patriotic united front besides “all socialist workers” and “all patriots who support socialism or who support the reunification of the motherland” in previous version.

“It will promote long-term prosperity and stability in Hong Kong and Macao” is added.

— Referring to the Party’s foreign affairs stance, the Party constitution includes that the CPC “adheres to an independent foreign policy of peace, follows the path of peaceful development and a win-win strategy of opening up,” and pushes for the building of a harmonious world of lasting peace and common prosperity”.

— “The Party ensures the People’s Liberation Army accomplishes its historical missions at this new stage in the new century, and gives full play to its role in consolidating national defense, defending the motherland and participating in the socialist modernization drive” is added into the Party constitution.

— The general program of the amended Party constitution puts forward new requirements on strengthening and improving the leadership by the Party and Party building.

“The Party should thoroughly apply the Scientific Outlook on Development” and “persist in scientific, democratic and law-based governance” are newly added.

— The new constitution raises new requirements for the Party members and cadres.

“To study the Scientific Outlook on Development” and “legal knowledge”, and “To take the lead in putting into practice the socialist maxims of honor and disgrace” are added as Party members’ duties.

“To take the lead in applying the Scientific Outlook on Development”, “to foster a correct view on evaluating their performances”, and “to improve their moral standards” are added as requirements for leading Party cadres.

— Concerning the Party organization system, “Party organizations at all levels should increase transparency in Party affairs in accordance with regulations to keep Party members better informed of these affairs and to provide them with more opportunities to participate in them” is newly added.

“A tenure system is adopted for delegates to Party congresses at all levels” is for the first time included in the constitution. The spokesman explained that this addition is designed to empower delegate to supervise the Party committees at all levels.

“The Party’s Central Committee and committees of provinces, autonomous regions and municipalities directly under the central government implement the system of inspection tours” is newly added to advance the anti-corruption work.

In order to promote inner-Party democracy and strengthen inner-Party supervision, “the Political Bureau reports its work to the plenary sessions of the Central Committee and accepts their oversight” and “the standing committees of the local Party committees at all levels regularly report their work to plenary sessions of local Party committees and accept their oversight” are added into the new version.

— New requirements are also raised for grassroots Party organizations.

“To serve” Party members is added as one of their main tasks, besides “to educate, manage and oversee” the members. It’s a requirement in accordance with the newly added stipulation of “to organize Party members to conscientiously study the Scientific Outlook on Development”.

It also adds “to improve management of Party members among the floating population” into the amendment.

Source: Xin Hua

China may overtake the United States to become the world’s second largest exporter this year if its current export growth speed continues, said a senior government official on Saturday.

Yu Guangzhou, vice minister of commerce, told the China Economic Development Forum that for now China ranks the third after Germany and the US in terms of export volume, but it is highly possible that China will surpass the US to be next to only Germany within this year.

In 2006, China’s export volume trailed that of the US only by less than 70 billion U.S. dollars, while its export growth speed was seven percentage points higher than that of the US. Calculated with the current growth rate, China’s export may possibly exceed that of the US by 50 billion U.S. dollars this year.

Observers in Beijing estimated that if China maintains its foreign trade growth rate, it will replace Germany to become the world’s top exporter next year. In terms of total foreign trade volume, China will possibly surpass Germany to become world’s no. 2 this year or by next year, with the US ahead only.

Customs statistics show that in the first half of this year, China’s foreign trade volume reached 980.9 billion U.S. dollars, up 23.3 percent year-on-year. Of this, export grew 27.6 percent to 546.7 billion dollars, while import grew 18.2 percent to 434.2 billion dollars.

Yu said that China’s foreign trade structure has been gradually optimized through readjusting tax rebate policies and processing trade policies. The export of high energy consuming and high pollution products has dropped sharply.

Source: China Daily Online

China’s trade surplus reached 22.45 billion US dollars this May, 5.47 billion dollars more than in April, and next only to February in value. In the first five months, trade surplus accumulated to 85.72 billion dollars, up 83.1 percent year on year.

From the latter half of this year, experts predict that the growth in trade surplus may slow down. However, elements contributing to China’s long-term trade surplus will continue to exist and the entire year’s surplus still remain relatively high.

Growth of trade surplus, an outcome of international industry shift

The growth in China’s trade surplus is an outcome of international industry shift, said Wang Xinpei, spokesman of the Ministry of Commerce. Due to factors including the nation’s economic development stage, status in the international labor division, and economic structure, it is quite impossible that trade surplus will dwindle in the short term. It might exist for a long period, along with industrialization process, making the balance of imports exports a long-term task.

According to a report, released on May 29th, by the National Development and Reform Commission, as international industries sped up the process of economic globalization, China’s trade surplus with America and Europe has largely replaced that of East Asia with the two regions. Meanwhile, international market demands remain robust. According to the latest prediction by the International Monetary Fund, the world economic growth rate in 2007 would approach 5 percent and the world trade growth would hit 8.9 percent- both noticeably better than in previous years.

Meanwhile, back home, rich labor resources, strong coordination between main and related industries, and low factor price has also fueled the ever-enlarging trade surplus. In addition, after joining the World Trade Organization, China has slashed tariffs and removed various import non-tariff barriers. The export environment has also improved, creating favorable conditions for the use of foreign capital and overseas investment. The rapidly expanding manufacturing capacity has begun its output, which has increased exports significantly.

As a matter of fact, a trade surplus is unavoidable during the process of industrialization. The United States, Germany and Japan all witnessed large-scale trade surpluses in their course of development, which continued for quite a long period of time.

Accelerate the transformation of foreign trade growth mode-the key to reducing the surplus

However, what cannot be neglected are the contradictions and problems resulting from the excessive growth in the trade surplus: two much liquidity will affect the national economy as a whole, and undermine the stability of macro-economy; resource waste and environmental pollution are noticeable. Friction within international trade has also worsened.

The Chinese government, paying close attention to the issue, has taken effective steps to reduce the surplus.

The Ministry of Finance announced on June 18th that as of July 1st, China would again adjust export tax rebate rates on some commodities. The latest adjustment involves 2,831 commodities, affecting about 37 percent of all customs goods. Of these commodities, tax rebates are cancelled for 553 commodities with high energy consumption, high pollution and resource consumption-including cement, dyestuff, metal carbides, activated carbon products and leather. Rebate rates are cut for 2,268 commodities prone to trade frictions such as garments, shoes and caps, clothing chests and bags, and toys. Since 2004, China has adjusted its export tax policy for iron and steel products six consecutive times. Now, export tax rebates for most iron and steel products cease to exist, and export tariffs will be imposed on more than eighty such products.

While managing the export structure, we should also rely on expanding domestic demand and enlarging imports in our efforts to reduce the surplus.

By now, the Ministry of Commerce has cancelled import licenses for more than 1,600 commodities, and will spell out measures to encourage hi-tech imports, such as mechanical and electrical products. Large holding enterprises are encouraged to purchase overseas and privately run companies to expand imports.

China has always pursued an international payment balance as a major goal of its macro-regulation, and never deliberately sought out a trade surplus, said Chong Quan, Assistant Minister of Commerce. The Chinese government is making efforts to re-address the imbalance in imports and exports, he said, and China also hopes relevant countries can remove unreasonable barriers on high-tech exports to China, so as to create conditions for more imports from China.

Editor: Yangtze Yan Source: Xinhua

At one time Hong Kong amazed the world as it transformed itself from a colonial fishing outpost into an economic miracle. Today it’s impressing the globe again to become a political wonderworks — a capitalist city thriving in a socialist country.

Ten years after its return to China, Hong Kong — with its political, economic and social systems largely unchanged since the end of British rule — has evolved along with the rest of the country to become even more vibrant and prosperous. The naysayers of the “one country, two systems” must surely be embarrassed.The “one country, two systems” was first put forward by late Chinese leader Deng Xiaoping in the 1980s as a potential solution to China’s thorny Taiwan issue. The creative compromise formula charted the way to Hong Kong’s successful and peaceful return to China in 1997.The basics of the system saved face, instilled pride and maintained peace. It allowed the British a graceful exit and returned to China what was rightfully due.It all came to pass at the end of Britain’s 99-year lease over Hong Kong, which had been signed after foreign powers of the day purposefully debilitated China with massive imports of opium.Britain had already been the chauvinistic ruler of Hong Kong Island for five decades when it forced the teetering Qing dynasty in 1898 after the Opium Wars to lease areas south of Shenzhen River and north of the Boundary Street and more than 200 nearby isles for 99 years.Not even a bit of revenge or atonement was sought by China’s leaders during the handover negotiations. The cooperative approach found in the “one-country, two-systems” formula has now become a staple of China’s foreign policy.The policies entrenched in the agreement have been faithfully implemented by the central government and they have helped Hong Kong to quickly change its identity from a former British colony to a special administrative region of China.Over the past decade, maintaining Hong Kong’s long-term stability and prosperity has remained the primary consideration of the Chinese central government in all its dealings with Hong Kong.Top Chinese leaders, including President Hu Jintao and former President Jiang Zemin, have staunchly supported the principles of the agreement and have guarded Hong Kong’s security as one would a member of the family.During the Asian financial crisis, the Chinese central government stood shoulder with Hong Kong as the city fought off currency speculators and survived the financial disaster that ravaged so many Asian economies.The central government was also a first-responder of aid when Hong Kong became ground zero in the SARS health crisis and continues to protect the region with rigid border policies aimed at controlling the spread of the bird flu.While dealing with difficulties has been a mainstay of the 10-year-old relationship, the “one-country two-systems” formula has also helped broaden horizons, create wealth and provide a new sense of self-confidence in the entire nation.In 2003, the Chinese mainland and Hong Kong signed the Closer Economic Partnership Arrangement (CEPA), gradually scrapping tariffs on products manufactured in Hong Kong, expanding market access for Hong Kong services on the mainland, and improving trade and investment facilities.To help rejuvenate Hong Kong’s tourism industry, the central government has made it easier for more mainland residents to visit Hong Kong. This has helped create thousands jobs and brought billions of dollars into the city each year.The enhanced economic cooperation between Hong Kong and the mainland has helped propel Hong Kong’s image as a prosperous free port of the orient and maintain its international prestige.The high degree of autonomy Hong Kong enjoys under the “one country, two systems” has enabled Hong Kong people to become the “real masters” of their soil.Since the 1997, Hong Kong has held three elections for chief executive officer. Prior to the handover, Hong Kong’s governors were simply appointed from London. They were all white men as were most of the top civil service officials.Now the top leader of Hong Kong, known as the Chief Executive, is elected by a kind of electoral colleague, which is made up of elected representatives from various sectors such as labor and business.As anniversary celebrations this weekend acknowledge the Hong Kong success story, even the one-time pessimists have to admit that city is now stronger and more mature and certain of its future.A recent survey conducted by the University of Hong Kong showed that Hong Kong people’s trust in the central government and the ideas embodied in the “one country, two systems” have reached a new height.About 78 percent of Hong Kong people said they have confidence in the formula and 81 percent believe in a bright future for Hong Kong.Former British Prime Minister Margaret Thatcher, whose government negotiated the handover agreement 13 years ago, recently told the BBC that the worries about Hong Kong’s future “have largely proved groundless.”

British Foreign Secretary Margaret Beckett said in a speech during a recent visit that there have been some bumpy moments over the past ten years, but the more dire predictions have not come true. “One country, two systems has worked,” she said.

Jan. 2007 – China Daily
Zhou Xiaochuan, governor of the People’s Bank of China, the country’s central bank, was recently quoted by media both at home and abroad as saying that the central government was planning to restructure the Central Huijin Investment Co, so as a commercialized institution operating on sound market principles it would take care of State stakes in financial institutions.

As some of the media comments pointed out, it was the first time the central bank head has openly expressed his position on restructuring Central Huijin, ending speculation about the company’s future.

Inaugurated on December 16, 2003, Central Huijin was originally meant to help restructure the Big Four State-owned commercial banks that were loaded with large sums of non-performing loans. Its mission also included improving corporate governance of the Big Four, part of preparation for stock market listings.

After three of the Big Four Bank of China (BOC), the Industrial and Commercial Bank of China (ICBC) and China Construction Bank (CCB) issued their shares and were welcomed by investors, Central Huijin should be viewed as a successful participant in China’s financial reform.

It also means that the time is right to restructure Central Huijin with new goals.

The restructuring of Central Huijin not only decides the future of the company itself; it also becomes a crucial part of the management and operation of the gigantic financial assets owned by the State.

By now, the financial assets of the country are more than 50 trillion yuan ($6.2 trillion), 43 trillion yuan ($5.3 trillion) of which are controlled by the banks.

As the holder of the State-owned financial assets in the financial institutions, Central Huijin must have guidelines about its mission, business mode and operation mechanism as well as its relationship with the government.

The idea is circulating that a financial commission should be established based on the Finance Department under the Ministry of Finance to take care of State-owned financial assets. This agency would act as a representative of the State as the owner to these assets and also manage the assets directly.

Many oppose this suggestion because the investments of Central Huijin in BOC, ICBC and CCB were all from the country’s foreign exchange reserve, which is the liability of the central bank. In other words, these are not State-assets at the disposal of the central bank or the government.

Moreover, the critics believe an administrative body under the Ministry of Finance would not make a clear distinction between its business goals as asset manager and public policy targets as an administrative body.

Therefore, the business model of Singapore-based Temasek Holdings will probably be followed in the restructuring of Central Huijin to give it a market-based position.

Created in 1974, Temasek Holdings is an investment company fully controlled by the Singapore government. Holding nearly all of the country’s biggest companies, from transportation, telecommunication, banking to tourism, the investment company makes considerable profits every year.

Governor Zhou Xiaochuan made a point in his remarks about restructuring Central Huijin. If restructured as a holding company of financial assets, it could operate according to the law of the market economy, make decisions more flexibly and have less limits on its commercial activities in the capital market.

Yet a new position for Central Huijin must be legally defined, no matter what its future direction.

The authorities should define by law the company’s function, targets, structure, business mode, appraisal of achievement and supervision. The law should also spell out Central Huijin’s relations with all relevant departments.

Because of the absence of such law, Central Huijin is not legally authorized though it does operate with the consent of the government. Without an explicitly defined position, Central Huijin cannot clarify its relations with the State or the central bank as an agent managing State financial assets.

Admittedly, the business mode of Temasek Holdings has precious value as a reference for addressing the problems encountered by Central Huijin. Yet, it would be vital for us to understand the essence of this model before we make substantial moves in its direction.

Established to meet market requirements, Temasek Holdings does not enjoy any favorable policy from the government, nor is it subject to any government intervention in its investment decisions.

Judging from the current business of Central Huijin, major changes need to be made before it can follow in the path of Temasek Holdings.

With full administrative penetration, Central Huijin should attribute most of its profits to government policies. Without the support of the government, it is almost impossible for Central Huijin to achieve commercial revenues on its own.

As the biggest shareholder of the three listed Big Four commercial banks, Central Huijin benefits from government policies. The three banks would have been unlikely to go public so quickly and be so profitable without government support.

The author is a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences

(China Daily 01/26/2007 page10)