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«Inaugural-Dissertation zur Erlangung des Doktorgrades des Fachbereichs Wirtschaftswissenschaften der Johann-Wolfgang Goethe-Universität Frankfurt am ...»

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cated. This leaves room for local deviations and interpretations and thus the degree to which those laws are implemented on the local level again strongly depends on the character of local cadres.1557 As another example for the mutual influence between central state and local developments is the problem of private property rights. To sidestep the problem of ownership in a time when private property was still not officially sanctioned, villages were authorized to decide on the ownership of former state domains. The local bureaucracy of imperial China was revived to deal with the question of property rights. The village councils gave land use rights to peasant families or private entrepreneurs to enable the establishment of small businesses. For this, contracts were used, enforced by local arbitral courts, which were already known during the Ming Dynasty1558 as ‗harvest splitting contracts‘.1559 The entrepreneur got a fixed wage plus a certain percentage of the profits as incentive. Within the villages, kinship networks helped to protect private property and thus facilitated growth.1560 As in the past, family ties served as a buffer against social insecurity, fulfilling duties like acting as juridical authority and lending money, thus creating enforceable trust.

The clan again filled an institutional gap in Chinese social and political structure, serving as ―monitoring and sanctioning power‖.1561 This scheme was finally officially legalized with the Household Responsibility System (HRS) in 1981, one example of the Chinese central government ex post legitimizing actual procedures which from then were to be uniformly followed in entire China.1562 Other restrictions for private enterprises were finally removed by settling the question of inheritance, rent and transfers. However, especially during the 1980s, the private sector was still officially illicit in accordance to central govKrug and Mehta, 2004, p. 54f.

The Ming Dynasty was the ruling dynasty of China from 1368 to 1644.

Krug, 2002b, p. 137f. During the Ming and Qing dynasties it was common to use written contracts for the transfer of property. However, as the Chinese law code was primarily a criminal code, enforcement of these contracts could not be enforced by law. Contracts were thus dependent on mutual trust, which also means that contracts were not much more than „statements of intent―. No penalty clauses were included as there were no independent means to enforce the contract. Dispute would be solved over the network. Faure, 2006, p. 34f., 89f.

Peng, 2004, p. 1048.

Goode, 1970, p. 297f., Peng, 2004, p. 1051f. Please refer to chapter 7.2 for the example of Wenzhou.

―[Toward] the end of 1978, a small number of production teams, first secretly and later with the blessing of local authorities, began to try out the system of contracting land, other resources, and output quotas to individual households. A year later, these teams brought in yields far larger than those of other teams. The central authorities later conceded the existence of this new form of farming but required that it be restricted to poor regions. However, most teams ignored this restriction. Full official acceptance of the HRS was eventually given in late 1981, when 45 percent of the production teams in China had already been dismantled. By the end of 1983, 98 percent of production teams had adopted HRS‖. It is also argued that the HRS revived the customs of traditional written contracts, so-called ―bao‖. The usage of this term in economic relationships indicates that it is a well-known institution from the past. Lin, 1992, p. 37, Faure, 2006, p. 73-75, Kelliher, 1992, p. 57.

ernment regulations which meant that private property rights were still not officially enforceable. From 1984 an official law secured the use of the land for fifteen year tenure. In 1988, private enterprises with more than seven employees (sīyíng qǐyè, see also chapter 7.1.) reached an official legal status, but still regarded the private sector as subordinate to the state sector and were kept that way for example by harsh credit constraints. On the NPC annual meeting in Beijing on 14 March 1999, it was decided to amend the constitution to protect private property rights, again being revised in 2004, at the Second Session of the 10th NPC.1563 The Property Law of the PRC (wùquán fǎ 物权法) has been approved on the 5th meeting of 10th NPC on 16 March 2007, coming into effect on 1 October that year.1564 A similar example can be found in the enactment of the ‗Unified Contract Law‖ of 1999 which includes all basic law principles for contract law such as ―offer and acceptance and good faith in the process of forming contracts‖. It replaced the bureaucratic process of obtaining approvals that determined the validity of contracts in use before but still leaves a lot of room for (local) interpretation. However significant the enactment of the law was, at this point Guanxi was still ‗officially‘ needed to fill the gap of contract security.1565 Nevertheless, it meant progress in that contracts are effective when they are concluded, not when the process of approval by the local government is completed. It is counterbalanced by the fact that contracts always have to be in accordance with other administrative regulations, ―respect public morality, and avoid disruption of economic order and harm to the public interest of society‖. Additionally, without the procedure of government approvals no set interpretation of the requirements of the law exists which leaves room for local deviations and will result in the need to use Guanxi to secure contracts.1566 A more problematic example would be the case of insider trading regulations, which, considering the importance of Guanxi, seem to be nearly impossible to enforce. However, the first regulation was already enacted in 1990, when the Chinese stock market just developed. The Chinese term for ‗insider trading‘ (nèimù jiāoyì, 内幕交易) has been first used in Qian, 2000, p. 161, Tsai, 2006b, p. 137, citing article 11 of the Chinese constitution: ―The state protects the lawful rights and interests of the private sector of the economy, including individual and private businesses. The state encourages, supports and guides the development of the private sector, and exercises supervision and administration over the sector according to law‖. Additionally, article 13 states: ―The lawful private property of citizens shall not be encroached upon‖. Please see also chapter 5.1.4.

Whyte, 1995, p. 1013f., Nee and Opper, 2010, p. 6 and State Administration for Industry & Commerce of the PRC,, accessed 9 November 2010. However, even if private property is officially protected, in reality this might mean nothing. Anecdotal evidence from China reveals that local governments can still expropriate an owner if it decided that a business zone for example is rededicated as housing area.

Potter, 2008, p. 191f.

Potter, 2008, p. 193f.

Provisional Measures for Regulating Securities Companies of 1990. It comprised not many specific regulations and is thus received as being merely of symbolic and political value. It was changed again in 1993 in two separate regulations (namely the Provisional Regulations on the Administration of Stock Issuance and Trading and the Provisional Measures for the Prohibition of Securities Fraud), adding details on insider trading. Additionally, the NPC changed the criminal law so that it included insider trading in 1997. In 1999, finally the Securities Law of the People‟s Republic of China came into effect which was designed after the example of US insider trading regulations. It was hoped that together with highly developed laws, also the stock market would work effectively like in developed countries as the US. However, although insider trading seems to be a severe problem in China only very few cases are reported.1567 Most articles on the topic criticize details of the regulation, but only in the sense that it does not imitate the US law perfectly, without giving any consideration on cultural or social issues connected with the topic. Loopholes are only seen in misspecifications of details within the law: "There are, however, some serious problems with the Chinese law, due to the uncritical implantation of overseas experience. This is strikingly illustrated by the loopholes found in the definition of insider which are inherently related to the confusion around the underlying theory of insider trading liability‖.1568 Taking Guanxi relations into account and the affinity of Chinese businessmen to solve problems in an unofficial way, it seems doubtful that a reliable reporting will ever be established. More than that, insider trading might be a major and persistent problem of the Chinese stock market. Bearing in mind that the norms of Guanxi make a huge difference between people in- and outside one‘s circle, insider information can be seen as part of the Guanxi system of favors. Unsurprisingly, empirical research found that Chinese students are far more acceptant towards insider trade than US and even Taiwanese students.1569 These few examples of changes to the legal system can also serve as a perspicuous illustration of institutional change. It can be argued that this process is a composition of layering and conversion of institutions. Both are types of change that do not exploit gaps between rules and their enforcement but leave it intact. However, by adding new amendments and additions to its laws, the Chinese central government gradually transformed its legal system to better fit the new economic circumstances without giving up its political principles, although also foreign practices were imported in the process. It is thus difficult Huang, 2005, p. 283ff.

Huang, 2005, p. 322.

Statman, 2009, p.54f.

to regard this process as one that follows a certain trajectory, although ex-post it certainly does. In that, it is rather a process of cumulative causation than a path-dependent development.

These few examples show very vividly, how the Chinese legal system is not only heavily fragmented between central and local level, but that it remains also very problematic to import foreign legal arrangements (and thus foreign customs), like also the experience of post-soviet countries proved in a very obvious way. However, China manages to combine the new laws with old traditions and in accepting local differentiations; it constructed a legal system that not to a small part relies on Guanxi to be effective.

9. Concluding remarks and main findings

–  –  –

9.1. China’s development process and institutional change As has been outlined throughout this work, China‘s development has been very impressive, but also very unequal in different regions and sectors - in terms of progress, but also in terms of the importance of the private sector and hence, Guanxi. Among other factors such as proximity to Hong Kong, this rather geographical pattern of growth can be explained by the uneven distribution of personal networks. Especially in the beginning of reforms, investments in the private sector often came from Overseas Chinese, and were typically directed towards their own families and thus specific communities, which mostly were in coastal regions. These investment decisions were thus often not made according to Western conceptions of industrial location that emphasize first and foremost the proximity to markets and demand, low-priced production factors and a favorable political climate.1571 Nevertheless, it was especially the last which was influential for China‘s development, as the example of Wenzhou demonstrates. It has been argued that regions and sectors that are more influenced by the state sector are less influenced by Guanxi than privately organized sectors, but this work does not argue for the existence of different varieties of Capitalism within China.1572 Although there is a ―patchwork of local political economies‖, as different sectors and regions show different patterns of Guanxi capitalism, it is possible to carve out some underlying fundamentals that permeate all areas. This dissertation aimed at presenting a holistic picture of the development path of post-reform China, focusing only on a few specific characteristics to discover the basic principles of the process. It has been proved that Guanxi Capitalism combines elements of state-led, network and global Capitalism that interact on the local level of both the political and the economic sphere.1573 It has to be emphasized again that this work does not claim to present an exhaustive picture of the Chinese economic system; although it provides a synthesis of a large body of knowledge, it Heilbroner, 1985, p. 89.

Pye, 1995, p. 51.

McNally, 2010, p. 2.

McNally, 2007a, p. 196.

is limited to certain societal and cultural aspects. Nevertheless, it seeks to provide some meaningful insights into the workings of a Chinese Capitalism that uses Guanxi as one main factor for its success, even with the risk of appearing overly simplistic. To put it differently, this work has tried to get one step closer by stepping back: so that the forest and not only the trees can be seen.

This dissertation has discovered that the essentials that characterize the Chinese economic system are defined by a network or Guanxi Capitalism and the driving force of development can thus be attributed to the private sector and its entrepreneurs. It has been found that since the VoC-approach does not incorporate the political and economic dynamics of a post-socialist country in transition and takes a democratic polity as given, it is less capable than other approaches of describing the type of Capitalism developing in China.1574 The political structure of China and its developmental and transitional economy is still far from having an established institutional framework. By contrast, its institutions are still constantly changing and thus defy the possibility of being described in a ‗snapshot‘ analysis like that of the VoC, or of even being compared to already existing ‗snapshots‘.

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