Nice to see this entertaining story finally (what took so long?) hit the mainstream press. If you somehow missed all my previous posts on the topic, check those out here or search for “proview” on China Hearsay.

The only real news this week regarding the dispute between Proview and Apple over the iPad trademark is that Proview has apparently filed an enforcement application with the Beijing Administration of Industry and Commerce (AIC). I’ll turn to that in a second, but if you’re keeping score at home, that means we have a pending appeal to the High Court on a Shenzhen contract-based lawsuit that Proview won at the lower level, and a trademark infringement case that Proview filed in Shanghai.

Since Proview is the legal owner of the iPad trademark in China and, as far as we know, Apple has no good evidence that Proview filed the trademark in bad faith over a decade ago, it certainly looks good for Proview in both cases, particularly the one in Shanghai.

So what’s with the AIC action in Beijing? Unfortunately none of the press accounts bother to mention who the AIC is or what Proview is asking them to do. Surprise surprise. No one bothered to do any research on an IP matter — once again. Everyone is piggybacking off a Beijing Evening News report that was picked up in English by Global Times. Most of the foreign media reports have (still) not done any real reporting on this.

If you therefore are confused about AIC, here we go. This is a government agency that has a very wide portfolio. It is a federal (State-level) agency — you will see references to SAIC, with the “S” meaning “State” — that has local offices (AICs) nationwide at different levels. The office in question here is the Xicheng District office of the AIC in Beijing.

Among other things, the SAIC incorporates China’s Trademark Office, so if you are thinking in terms of an organizational chart, the SAIC would be above that of the CTO. Additionally, local AICs have the authority to handle intellectual property infringement cases that involve trademark and unfair competition. In the case of the iPad dispute, we are dealing with trademark infringement.

What can the AIC do? It can raid premises, seize documents, equipment, products and counterfeit marks, and it can halt activity and lock down businesses. Once AIC makes a decision about infringement, it can order fines (these go to the government, not the trademark owner), revoke business licenses, and mandate a public apology.

Note that an AIC raid is often used by trademark owners as Step 1, with a civil lawsuit as Step 2. It would be interesting to know if Proview and its lawyers filed the AIC application in Beijing before filing the civil suit in Shanghai, and whether they have approached other AICs.

OK, so once again, in addition to the contract action in Guangdong, we have an infringement suit in Shanghai, and a pending AIC application in Beijing. According to the Beijing Evening News, which apparently talked to AIC, the authorities are sitting on this for the time being. Why is this happening?

I can only speculate that it’s political. Look, Beijing AIC can certainly claim that since this case involves a pending civil suit, they feel obligated to step back and wait for a resolution from the court in Guangdong. Maybe.

But AIC could act if it wanted to, and the court action is Guangdong is now an appeal that most folks expect Apple to lose. Proview is the owner of record of the trademark, and the infringement is crystal clear. No reason at all that AIC could not raid all the Apple stores and resellers in Xicheng District and effectively shut down all iPad sales there.

No, really. They could do so tomorrow if the political will was there.

So why are they sitting on this? My guess is that this one is just too high profile, Apple has too much clout (Proview who?), and AIC is worried about blowback. The pending court action is great cover behind which AIC can hide until, hopefully, a settlement is cobbled together by the parties.

In other words, don’t expect to see AIC officials come crashing through the door at the Sanlitun Apple Store tomorrow. Just understand that they could if they wanted to.

© Stan for China Hearsay, 2012. | Permalink | One comment | Add to del.icio.us
Post tags: apple, ipad, proview, trademark infringement

Over the course of my China law career, I’ve heard an endless series of statements from both foreigners and Chinese insisting that the “sue first, ask questions later” attitude in the U.S./UK just doesn’t apply to the PRC’s harmonious society. I learned early on that this conclusion is rubbish. Here’s more evidence to back me up:

China accepted 2.65 million legal cases in the last five years, with the number growing each year by an average of 23.5 percent, and provided legal advice for 20.78 million people, the number growing 12.8 percent each year on average, said the Ministry of Justice on Thursday.

I tend to think that this suggests more people have faith in the judicial system (at least for ordinary civil litigation). Seems like a good thing to me.

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Post tags: litigation

This post will no doubt spawn accusations of my having no holiday spirit and no sense of China’s cultural traditions, but so be it. Now that we’re well into the Spring Festival holiday and the fireworks have come down off their Sunday night peak, yet are still booming and banging sporadically at all hours (and scaring my cats), it’s fair to raise some questions.

Xinhua even ran a story today on the downsides of fireworks:

China’s New Year firework spree has not only left thousands of tonnes of scraps in Beijing but also driven up the city’s air pollution data to “hazardous” level until winds blew them away Tuesday morning.

The pollution issue is a minor one. By Monday morning, the smoke cleared away and the sky was a brilliant blue. Great weather again today, by the way. I think we can live with temporary smoke, particularly considering the usual state of air pollution in the city.

Two other issues, however, deserve more attention. The vast amount of litter generated by the fireworks is significant. I went for a walk around the neighborhood yesterday morning, and it was like strolling through a field of red flowers. Scraps of paper were everywhere, and there were lesser amounts of other fireworks-related detritus, such as cardboard and various kinds of packaging. For some reason, fireworks enthusiasts apparently do not feel obligated to clean up after themselves.

Now, I’m not saying that the expense of cleaning up all this trash is a big deal for the nation as a whole. The question is whether it’s necessary, or if there’s another way. I have to admit I felt really sorry for the old man with a push broom who was sweeping up the yard in front of my building yesterday. Every time he made progress, someone would set off another string of firecrackers, then walk away to leave the poor guy to his Sisyphean task.

In the grand scheme of things, I suppose none of this matters all that much. Folks enjoy explosions, so why not let them have their fun once a year? Fair enough.

For me, though, the trump card here is the fires, injuries and deaths related to fireworks. Difficult to ignore. Beijing has already debated this issue and settled on what Xinhua would call a compromise:

Chinese big cities including Beijing had instituted bans on fireworks, as it polluted the air and led to injuries and even deaths.

However, the Beijing authorities lifted the ban in 2005 under public wishes that fireworks burning could create more festive atmosphere. But the government restricted setting off fireworks within certain areas during a 16-day period around the Spring Festival to reduce accidents and the impact on citizens’ lives.

Not exactly the kind of compromise I’m looking for. Here’s the thing. If the goal is to allow people to enjoy fireworks and yet avoid fires, injuries and death, the solution is obvious. It’s also, coincidentally, the same conclusion reached by my hometown when I was growing up with respect to July 4th fireworks: municipal/local fireworks displays only.

As the CCTV building fire exemplified, your average guy is not an expert in handling explosives. Let the government, or public/private groups, handle these potentially dangerous toys, and allow the public to attend these displays and enjoy the spectacle. No fires, no injuries, no deaths, but plenty of bangs and booms and fun. Moreover, with fewer fireworks displays to soak up holiday expenditures, perhaps innovation and variety could be spurred on (I don’t know if you’ve noticed, but fireworks haven’t changed much in the past couple of decades).

What could be wrong with that?

© Stan for China Hearsay, 2012. | Permalink | 16 comments | Add to del.icio.us
Post tags: fireworks, New Year, Spring Festival

I’ve written twice already this week about administrative corruption. The problem is getting worse, and the government needs to find new ways to ensure that local bureaucrats are not taking bribes or embezzling funds. One of the obvious solutions is to raise benefits to a level such that bureaucrats are not tempted to supplement their incomes through improper means.

Coincidentally, the government is currently reforming civil servant heath care benefits. There are competing interests here that should be acknowledged, including fiscal constraints, equality of benefits, and (I would argue) anti-corruption.

The reforms that will go into effect this year curtail the government-provided free benefits in favor of pushing all civil servants into the health insurance program. This is fine, I suppose, assuming that the new scheme benefit level is comparable.

But some folks would like to see this reform go in a different direction entirely. Here’s one argument in favor of actually reducing benefits:

The message that the free healthcare enjoyed by civil servants will be incorporated into the general employees’ medical insurance system is the first step in reform of public welfare.

The medical costs of all 450,000 of the civil servants in the Beijing municipal government and its affiliated county and district governments have already been merged into employees’ medical insurance since Jan 1, and the change will be extended to civil servants in the central government next year.

The reason people have been calling for reform of the medical insurance system is there is a marked discrepancy between the reimbursement levels enjoyed by civil servants and those of other citizens.

However, the change does little to make the system more equitable as it means civil servants now have more hospitals to choose from than before and they can get exclusive supplementary insurance, which means that their medical service level will still remain much higher than that of other citizens.

Medical insurance is a basic public service provided by the State. Any reform in this field should be conducive to realizing public service equalization, instead of creating new inequalities.

Greater efforts are needed to lower the medical service reimbursement level for civil servants and to increase that of other employees.

OK, I’m all in favor of the idea of health care as a basic service provided to everyone by the government to all citizens (and residents!). However, we’re far from that reality in China at the present time, and there is a great deal of inequality built in to the system.

I would also acknowledge that there is a great deal of resentment out there of public officials and the special treatment they get. I’ve written about income inequality and related issues many, many times in the past couple of years and definitely see this as a huge problem that needs to be addressed immediately.

However, if the issue is inequality of benefits, we can engage in a race to the bottom, cutting benefits for some, or we can focus on raising the benefits of others. I’d much rather see the latter than the former.

Yes, civil servants enjoy certain unfair advantages. But instead of cutting their health care, let’s keep the focus on the Audis, the free trips, and the banquets. Taking away medical benefits while maintaining low salaries would just give them an additional incentive to engage in corrupt activities.

© Stan for China Hearsay, 2012. | Permalink | 6 comments | Add to del.icio.us
Post tags: anti-corruption, civil servants, health care, health insurance

Cartoon via Global Times

Real ID mandates have been applied to a wide variety of activities, from Internet cafes to purchases of train tickets to users of social media. I briefly discussed the transparency rules for prepaid shopping cards when they were introduced last year by the People’s Bank of China and outlined some of the anti-corruption goals involved. This all sounded good on paper at the outset, but now that some time is passed, we’re starting to see some of the limitations play out:

A rule that requires prepaid-shopping-card buyers to register their real names is thought to be making little headway in fighting corruption because of lax supervision and the lack of supporting policies.

In a bid to prevent money laundering, tax evasion and bribery, the State Council required in May 2011 that issuers of shopping cards register customers’ identities if they purchase more than 10,000 yuan ($1,600) worth of cards.

The face value of an anonymous card should be below 1,000 yuan, and a card bearing the user name should not exceed 5,000 yuan in value.

OK, here’s the problem. The rules were enacted in the first place because prepaid cards are a great way to store value anonymously and transfer that value to a third party in an untraceable manner. Instead of forking over an envelope with 50,000 RMB in cash to that local government official, simply give him a card that has 50K charged on it. Want to evade tax by paying your workers under the table? No need to have a lot of cash floating around, just hand out some prepaid shopping cards instead of higher salaries.

So the rules went into place to stop these kinds of activities. And indeed, apparently card activity is down significantly year-on-year. However, the rules had an obvious loophole: that 1,000 RMB limit. Sure, if you’re making a big payoff, handling a large number of 1,000 RMB cards might be burdensome. But for other kinds of transactions, that limit is not much of a hindrance.

For some companies, it doesn’t sound like much has changed:

The rule has had little effect on the shopping cards purchased by companies and given to employees as a way to evade taxes and the public will hardly know the exact amount of salaries of State-owned companies’ employees – nowadays the public is complaining a lot about the high income of State-owned company employees, according to an employee who works for a State-owned enterprise in Beijing.

“Last year we each received 30,000 yuan worth of cards. Following the rule, each card given to employees had a face value of no more than 1,000 yuan,” said the employee, who requested anonymity out of fear of retaliation from the company.

What’s to be done? Well, tracking of all purchasers could be done, but that doesn’t seem feasible, and industry would no doubt push back very hard against something like that. Moreover, it still wouldn’t really solve the problem unless enforcement authorities matched up purchasers with users/consumers, ascertaining where the money flowed. For example, a company could probably come up with some sort of an excuse as to why it purchased a certain number of cards, but if the users of those cards turned out to be their employees, then the explanation becomes a lot more difficult.

It sounds like the rules have helped somewhat but have hit a natural limit given the way all this was structured. Unless the government wants to really turn up the heat on purchasers and users of these cards, and meet the objections of card issuers and pretty much all retailers, I don’t think much more progress is going to be made.

© Stan for China Hearsay, 2012. | Permalink | 2 comments | Add to del.icio.us
Post tags: anti-corruption, prepaid cards, tax evasion

Thought experiment. You’re in charge of the country and have turned your attention to anti-corruption programs. You have limited resources and need to choose between various options.

Do you:

1. Put your money towards enforcement at the high end (i.e., high-level officials/individuals, or large amounts of money); or

2. Go for a broad-spectrum approach of public media campaigns and training of local officials, hoping to reduce the overall incidence of corruption.

The obvious question here is where do you start? It’s an interesting thing to think about, particularly if the government decides at some point that a certain amount of low-end corruption is acceptable.

This was the topic of an article today by Global Times/Xinhua:

For regular government employees, their power may be limited but not so much as to deter them from occasional bribery and embezzlement, a phenomenon referred to as “ant corruption” that analysts say is becoming an increasingly common trend.

Experts warned that such “ant corruption” could harm the government’s credibility as it involves the officials working directly with the public to provide basic services.

Seems reasonable to conclude that if corruption is rampant, even if it is limited to de minimis amounts, that the public’s perception of the government would be seriously harmed. This might sound odd, but I am reminded of the reputation of the Mexican police. Growing up in California, where almost everyone goes down to Mexico at one time or another, the general perception was that the police there were just waiting to stop a gringo and shake him down for a few bucks. Maybe it was just me, but this colored my judgment of the Mexican government as a whole for many years. (If anything, that reputation is now worse!)

So this is one vote for going after all forms of corruption, even the small-time stuff. However, this may not be easy, particularly if such practices are commonplace:

“A small kickback or fee to express thanks is considered normal in my office or in the whole bureau,” an office clerk surnamed Li in Nanchong, Sichuan Province, told the Global Times. “I don’t think such a small amount of money will do any harm. It’s not like major corruption and we are just receiving people’s thanks after we do a small favor for them.”

Li, who was reluctant to reveal her full name, said that an employee rejecting such small bribes would be considered odd and ostracized by co-workers.

Sort of a variation on the “everyone is doing it” argument. Peer pressure is a powerful motivator, and most folks don’t want to be the odd man out, particularly in the workplace. Remember what happened to Serpico?

But getting back to our thought experiment, we have limited resources here. While we want to go after all types of bad actors (and the government does), we also need to admit that we can’t prioritize everything. Therefore, if we want to attack corruption, is it best to start with the big guys or the little guys?

One way to think about this is to ask what the goal is. Are we mostly worried about the billions of RMB that are embezzled every year? Is the fundamental problem related to public perception of government and administrative fairness? Are we mostly concerned about the victims of corruption (e.g. land swindles)?

Those are tough questions, and I don’t know the answers. Moreover, it’s not even clear what the effects are when you go after the big guys as opposed to the little guys. For example, take public perception of government. Stories about high-level officials that embezzle millions certainly sour public opinion of government. On the other hand, if every time folks go to a local government office for a routine transaction they are expected to grease a palm, then public opinion of the bureaucracy also takes a hit. Which is worse?

The most troubling issue here, buried halfway down that Global Times/Xinhua article, is that “ant corruption” seems to be getting worse:

Over 140,000 government staff received disciplinary punishments last year, among whom only 4,843 officials were over the county-level of administration. A total of 8.44 billion yuan in economic losses were recovered, according to the Ministry of Supervision on January 6.

These stories are not isolated cases but are becoming more and more common in China, according to the anti-corruption blue paper released by the Chinese Academy of Social Sciences earlier this month.

Forms of corruption have moved from mainly being perpetrated by individuals to group crimes using more careful methods to avoid detection. Corrupt officials are also favoring long-term bribes than short-term gains, the blue paper said.

Why is this getting worse? What does this tell us about enforcement efforts? Will this have a negative effect on social stability?

Too many questions, not enough answers, and a problem that isn’t going away anytime soon.

© Stan for China Hearsay, 2012. | Permalink | 10 comments | Add to del.icio.us
Post tags: bribery, corruption, local government

Classic bureaucratic fuckedupedness:

A kindergarten in Shenyang, capital of Liaoning province, is frustrated because the newly bought school bus can’t get a license plate. In the past two months, Zhang Xiujuan, deputy head of Shenyang Shangye Kindergarten, tried repeatedly to apply for a license plate without success.

Gong Bin, an official with Shenyang transportation bureau, spoke of various transportation regulations in the city, the province and the country, but said that none specifically addresses urban school buses.

OK, there is a charitable way to look at this issue. Modern bureaucracies are complicated beasts that are not able to respond to everything immediately. So when you get new rules, and there are new rules every day, it takes some time for implementation. This is sometimes tougher than you’d think. In some instances, the new rule requires additional resources and new procedures, and often a path needs to be cleared through the existing bureaucratic thicket to ensure that such implementation is even possible.

To make matters worse, bureaucrats are inherently conservative and inflexible, knowing that they are almost never punished for doing things the old way. Doing things differently, in contrast, brings with it the possibility of getting something wrong, being criticized, and/or ultimately losing one’s job. Can’t have that.

If you think about it, it’s amazing that anything actually gets done at all. Indeed, I remember when I first came to China and started reading new laws and regulations, I was concerned that given the frequency of such updates, that we would eventually run into trouble with respect to overlapping agency power and internal contradictions. It’s scary (and I mean that in a “wow, I’m impressed” way) how much has been done in the past twenty years or so.

The Shenyang school bus case is one of those frequent situations where one goes to an authority with a problem, and instead of receiving either a yes or a no, you get a “没有办法,” which basically means that there’s no way to do that. Happens every day when the bureaucratic structure isn’t equipped to deal with something.

Of course, there is a less charitable way of looking at this. Apparently there is some dispute over whether existing rules are up to the task:

There are regulations in place for the licensing procedure of rural-area school buses in Shenyang.

Lin Chongfu, marketing manager of Dandong Huanghai, a school bus maker, confirmed that. “All of our buses are sold to rural areas. And there are no such problems,” Lin said.

So it’s possible that the regulatory authorities are just giving these guys the run around. Note that “没有办法” is also the response one sometimes gets from regulatory authorities who are empowered to deal with a situation but simply don’t want to say “no” outright.

Apparently this issue of school busing from rural communities is a relatively new one and that urbanization has created some new problems that the bureaucrats still haven’t addressed. Sounds plausible, although I for one find it hard to believe that in a city the size of Shenyang, something like this has just popped up and caught everyone by surprise.

It goes without saying that the appropriate folks in Shenyang (and elsewhere) should get off their asses and address this issue before the press attention makes them look bad. Kindergartners that can’t get to school? That’s some serious bad PR, guys.

© Stan for China Hearsay, 2012. | Permalink | 7 comments | Add to del.icio.us
Post tags:

It’s been a while since I forced a VIE post down your throats. Unfortunately, this topic is not going away anytime soon, and even though we’re still waiting to see what the government regulators will do, there remain significant legal and accounting risks to consider.

Paul Gillis and Fredrik Öqvist have been busy reading disclosure statements of listed companies with VIE structures. Remember that VIE refers to the Chinese onshore corporate entity that has been “captured” by a foreign investor via a series of contractual agreements to the extent that the VIE’s financials can be consolidated with those of the foreign enterprise.

The China operations of these companies are split between the VIE and other entities, which often include Wholly-foreign Owned Enterprises (WFOEs), which are directly-held subsidiaries of the foreign company. The issue that Paul and Fredrik are looking at is how the China assets of these operations are split between the VIE and other entities.

Many investors are rightly concerned about the proportion of assets held by the VIE and the proportion of income that is earned by the VIE. If most of the assets and income are in the VIE, a moral hazard is created for the VIE owner, since it might be in his economic interest to terminate the VIE contracts and take the VIE.

In many instances, the VIE, owned by one or more Chinese nationals, is the entity that holds the crucial operating licenses and receives the vast majority of revenue. For Chinese nationals who are the owners of record of the VIE, that’s some serious motivation to abscond with the business.

Moreover, if most of the goodies are with the VIE, and such a dispute arises, then any formal legal action becomes that much more difficult. We’ve discussed this many times before, but whether or not that VIE is considered part of the foreign company’s operations for accounting purposes will probably make little difference to a judge, who will place a great deal of emphasis on the identity of the legal owner.

This is what Paul and Fredrik have come up with thus far:

Assets in the VIE ranged from 0% to 100% of consolidated assets, with a mean of 33%. Net income in the VIE ranged from 0% to 221% of consolidated net income, with a mean of 56%.

That’s a significant percentage of revenue flowing through an entity whose legal relationship with the foreign company (in this case, we are talking about an entity that is listed on a U.S. stock exchange) is shaky at best.

Here’s where it gets a bit technical:

The net income findings are particularly troubling. Under the standard VIE arrangements all of the profits of the VIE are supposed to be extracted through the technical service agreements with the WFOE. Those technical service agreements are a critical component in establishing the right to receive the expected residual returns of the VIE that is required in order to consolidate a VIE (ASC 800-25-39). What that means is that the public company must have a right to get the profits of the VIE or it cannot be consolidated.

The technical service agreements establish that right, and they have been accepted by accountants as meeting the requirements for consolidation, even while lawyers have indicated there is substantial uncertainty about the enforceability of the contracts in Chinese courts.

To simplify, consider a WFOE and a VIE, with a service agreement in place between the two that says the WFOE shall provide blah blah blah services to the VIE, usually with very broad language and unclear commercial terms.

What’s the problem with the service agreement? Two things. First, as I’ve written about before, the general purpose of the agreement might be to circumvent foreign investment restrictions. If so, it’s void on its face pursuant to the Contract Law.

I certainly wouldn’t want to go into court and try to defend an agreement that purports to be an arms-length service contract with these commercial terms. For example, let’s say the VIE makes $100 profit in a given year, and just so happens to pay the WFOE $85 for vague services rendered. Nothing strange here, judge!

Second, there’s a potential business scope problem. The language of these agreements is murky, and usually includes lots of references to consulting and technical services. Good enough for most accounting purposes, but remember that in many instances, the VIE is engaged in a business that is prohibited to foreigners. In other words, a WFOE may not engage in this type of activity by itself.

So what is the WFOE actually doing? In some cases, it is providing actual services, although perhaps not always at a level that would justify siphoning off so much of the VIEs profits. In other instances, it is actively running the operations of the VIE, co-mingling personnel and infrastructure in a classic “rent-a-license” fashion. That’s a big no-no if it’s being done the wrong way, as the WFOE’s business scope does not allow it to be directly engaged in the VIE business.

The risk here is that the tax bureau and/or the Administration of Industry and Commerce (AIC) will stick their noses into the relationship between the WFOE and the VIE in order to determine if the WFOE is acting outside its business scope. Since the WFOE is paying tax based on the amount of the service agreement, I would be more worried about AIC than the tax authorities, but either one could present difficulties.

This is a common problem for folks playing in the China foreign investment sandbox. These kinds of games have been going on for twenty years. With the VIE arrangement, though, the listed company is publicly declaring that this contractual arrangement exists.

This brings us back to a familiar conclusion. The reason that a potential business scope problem exists in many cases is that at the heart of these structures, there’s fraud. To the outside world, this is a single consolidated operation controlled by a foreign company. Inside China, the official story is that the VIE is merely cooperating with the foreign enterprise. There’s a meaningful gap there, and a WFOE, which is set up to siphon off cash, is not legally allowed to completely bridge that divide.

Had enough for today? Paul says he will have additional posts on this issue, so stay tuned, and Fredrik already has another post up on VIEs and equity pledges, which I may or may not address in a future post.

© Stan for China Hearsay, 2012. | Permalink | 4 comments | Add to del.icio.us
Post tags: business scope, contract law, VIE

From the Wall Street Journal:

Natural monopoly. That’s the new term that China’s former state assets regulator has used to describe the dominance of the country’s giant state-owned enterprises – a dominance that economists and rivals say has been associated with high prices and low efficiency in many industries.

In a wide-ranging interview with the 21st Century Business Herald, Li Rongrong, the former chairman of the State-Owned Assets Supervision and Administration Commission, sought to dispel the notion that many Chinese government-controlled companies remain monopolistic, cumbersome and uncompetitive despite years of reforms.

“The monopoly of Chinese companies is mostly in the form of natural monopoly. It’s not like companies are using their monopoly to manipulate prices and the market,” Mr. Li said.

This guy has started a shitstorm over these comments, with criticism coming from academics and industry alike. I just have two points.

First, I don’t think Li understands what a ‘natural monopoly’ is. When the government steps in and, by fiat, creates a monopoly, that doesn’t make it natural. What makes a monopoly natural is that a firm’s costs in a given sector are most efficient when it is the sole producer. This happens whether government is involved or not. Does he really believe that “most” of these dominant public firms are natural monopolies?

Second, let’s remember the context here. There has been a great deal of criticism recently about the commercial behavior of certain State-owned Enterprises (SOEs), including telecom service providers that have been accused of pricing irregularities and poor services.

This is not just about public criticism. Last year, the National Development and Reform Commission (NDRC) opened an investigation into the activities of China Telecom and China Unicom, specifically their broadband Internet services. The NDRC’s authority here comes from China’s Anti-monopoly Law (AML), Article 7 of which states:

With respect to the industries controlled by the State-owned economy . . .  the state protects the lawful business operations conducted by the business operators therein. The state also lawfully regulates and controls their business operations and the prices of their commodities and services so as to safeguard the interests of consumers and promote technical progresses.

The business operators as mentioned above shall lawfully operate, be honest and faithful, be strictly self-disciplined, accept social supervision, shall not damage the interests of consumers by virtue oftheir dominant or exclusive positions.

So yes, SOEs enjoy special protection under the AML (i.e. are exceptions), but at the same time, the State is obligated to regulate SOE activity on behalf of consumers.

Mr. Li should understand that it’s not the monopoly status of SOEs that’s at issue here, but rather what these companies do with that power. If they abuse their market positions in ways that harm consumers, the government, under the authority of the AML, will step in.

© Stan for China Hearsay, 2012. | Permalink | No comment | Add to del.icio.us
Post tags: anti-monopoly law, NDRC

This probably goes without saying, but if you’re going to screw up and make a decision that results in a fireworks accident, make sure that the fire is not part of a world-famous landmark. The guy who took the fall for the 2009 CCTV fire was serving a seven-year jail sentence for his role in the blaze. He might have thought that under the circumstances, seven years was a pretty good deal. After all, the main building is a symbol of modern Beijing, made famous during the run-up to the Olympics in 2008. Everyone in the whole frickin’ world knows the CCTV building, and the fire next door was a huge embarrassment.

Apparently seven years was just for starters. While he’s been in jail, the authorities have been busy, and they just announced the addition of 13 years to the sentence for corruption and embezzlement. Sucks to be that guy.

© Stan for China Hearsay, 2011. | Permalink | 3 comments | Add to del.icio.us
Post tags: CCTV fire

Sorry to keep beating this dead, festering corpse, but I can’t help myself. When a journo could take 20 seconds and consult the Google Machine before filing a story, yet fails to do so, I get a little annoyed, particularly when the article involves a China legal issue.

The latest atrocity is in Reuters, a report on a statement by the Ministry of Commerce regarding merger review processing times. The official noted that some delays occurred because of the rise in deals under review (a 43% surge in 2011) but that MOFCOM will take measures in 2012 to speed things along.

All well and good. But once again, whoever wrote this piece falls into the same trap that practically all other foreign journalists fail to avoid:

[The official] rejected criticism that China used its anti-monopoly law to unfairly block the expansion of foreign and private-sector firms.

“We have always implemented the anti-trust law fairly on all types of companies, including state-owned, private and foreign firms,” he said.

Beijing’s rejection of deals, such as Coca-Cola’s bid to buy local fruit juice maker Huiyuan in 2010, has attracted sharp criticism from foreign commentators.

China appears, however, to have relaxed its anti-trust vetting this year.

That shit ain’t right. The above language suggests that the Coke deal is merely one example of a MOFCOM rejection. The implication is that there are too many rejections to list in their entirety, so the writer merely references one of them.

As regular readers of this blog already know, the Coke/Huiyuan acquisition was the only cross-border deal rejected since the law went into effect in 2008! One deal in three years; in 2011 alone, there were about two hundred notifications. Talk about misleading. And by the way, would it have killed Reuters to do some fact-checking on the date? The Coke/Huiyuan deal was announced in mid-2008 and was nixed in early 2009. What, 2010 seemed like a nice, round number?

The statement that China appears to have relaxed its AML vetting this year is cringe worthy. It assumes, first of all, that the review process was tough in the past (but see above on Coke deal). But there’s also a comparison here, that this year has been different. Hmm. One rejection in 2009, no rejections in 2010, and no rejections in 2011. A few conditional approvals along the way, including this year, but no overall trends with respect to enforcement.

Apparently whoever arrived at that ridiculous conclusion was drunk on eggnog at the time. Not only is it not true, but the writer didn’t even attempt to support it with data. Instead, he/she mentioned in passing the Yum Brands and Nestle approvals, as if this proves something. Idiotic.

Look, I don’t expect that all journalists who write about this stuff are competition law experts. Obviously, just by looking at the final two paragraphs, where the writer includes a meaningless statement about jurisdiction and a misleading (and also irrelevant) comment about the scope of the law, that there is a big knowledge gap here.

However, for heaven’s sake, if you can’t trouble yourself to pick up a phone and actually get a quote from an expert (yikes, real work!), then at least ask Mr. Google.

Thus endeth the rant.

© Stan for China Hearsay, 2011. | Permalink | No comment | Add to del.icio.us
Post tags: anti-monopoly law, merger review, mergers and acquisitions

China is considering new rules that would require long-term visa holders to part with certain biometric data. This has made some folks a bit nervous. Ryan at Lost Laowai is not too thrilled with this:

Because living in China didn’t feel uneasy enough, a new draft law currently under review will require any foreigners staying longer than 6 months in China to have their fingerprints taken by the Entry & Exit Bureau and kept on file.

[ . . . ]

I’m not at all against the government cleaning up the rather dodgy immigration system, but if time, money and energy is going to be spent to improve things, why not put some effort into making it more legitimate, friendly and fluid; rather than making foreigners feel like criminals the moment they arrive in the country. And what the hell is meant by “other human biological characteristics”… hair samples? Blood? Urine? Semen?

Unless the government is getting into human cloning or the practice of voodoo, I think they’ll probably stop with fingerprints. But the bigger question here is why do we need the new rules?

I’m surprised it took the government this long to mandate fingerprinting. The U.S. government pulled the trigger on this as a response to 9/11. Current rules, which I found on the State Department web site (i.e., I trust they’re current) mention the following:

In the Enhanced Border Security and Visa Entry Reform Act of 2002, the U.S. Congress mandated the use of biometrics in U.S. visas. This law requires that Embassies and Consulates abroad must issue to international visitors, “only machine-readable, tamper-resistant visas and other travel and entry documents that use biometric identifiers. Additionally, the Homeland Security Council decided that the U.S. standard for biometric screening is ten fingerprint scans collected at all U.S. embassies for visa applicants seeking to come to the United States.

In other words, if you want to visit the U.S. (the program was later expanded to include visa waiver visitors, with fingerprint and photo collection upon entry), you must consent to being fingerprinted.

China’s government, as you might know, is really big on something called reciprocity. If a foreign government applies certain fees, for example, on Chinese nationals for a type of transaction, there’s a good chance that China will do the same. If it can target that other country’s nationals, it may attempt to do so. If not, and only a broad implementation is possible, then China has to decide how important reciprocation is in that instance, factoring in the risk of pissing off all those “neutral” countries out there whose nationals may be effected.

I always assumed that once the U.S. started doing this, then China would follow in its footsteps eventually (not to mention other countries). If reciprocity wasn’t a good enough reason, there is the whole bureaucratic prestige factor. What with the electronic scanners and all, the program smacks of high-tech bureaucratic/law enforcement wizardry, and you know China does not want to look bad in comparison to U.S. authorities. No one wants to be responsible for letting the U.S. open up a bureaucratic biometry gap.

To be fair to the government here, though, the official justification of the new draft rules is the huge influx of foreigners and the problems of illegal residence and employment. I have no doubt that the current system needs an upgrade, both in terms of overall efficiency as well as new technology.

So why do some folks feel uneasy about all this? Well, the rollout of these biometric programs have not been without controversy. In addition, some of the paranoia is probably fueled by what we see in movies and on television. But fingerprints are merely another identifier, like someone’s name or DNA. A name is a general identifier, which you might share with others, while DNA or fingerprints are very specific, allowing the government to identify you specifically with a much lower rate of error.

Yes, I know there are privacy concerns. But really, I don’t think that we care so much that someone might see our fingerprint information so much as we worry about the government releasing other personal details, such as financial or criminal records, with third parties or other government agencies. But that can happen with or without fingerprints; it’s just that with better identifiers, it’s perhaps easier for governments to consolidate information. If we’re concerned that governments are getting more efficient at data collection and storage, well, good luck trying to slow down that trend. Personally, I stopped expecting any sort of privacy years ago when I began using Gmail and Facebook; now I just assume that Big Brother, in all his incarnations, is always on the job.

But there’s more to the uneasiness we feel. I don’t know about you, but I’ve seen or read countless fictional tales of planted evidence, faked biometric data, and nefarious related government actions. On CSI alone . . . well, you get my point. Of course we’re going to feel nervous about giving the government even more information. And let’s face it, governments often bring this upon themselves. Look at what the crack border security agents at the airport in Las Vegas did recently:

A Massachusetts woman who flew home from Las Vegas this week says an airport security officer took her frosted cupcake because he thought its vanilla-bourbon icing could be a “security risk.” Rebecca Hains told ABCNews.com today that a Transportation Security Administration agent at Las Vegas- McCarran International Airport confiscated her cupcake, saying the frosting sitting atop the red velvet cake was gel-like enough to violate regulations.

This doesn’t exactly inspire confidence.

The use of biometric data by governments, however, is inevitable. Why use ridiculously imprecise identifiers like names when technology can process unique fingerprint data? Get used to it.

© Stan for China Hearsay, 2011. | Permalink | 5 comments | Add to del.icio.us
Post tags: biometrics, fingerprints, immigration, visas

Image via Penn Olson

I’ve written before about the pushback on Alibaba’s new rules for its e-commerce platform, Taobao, but here’s an update on the basics before I get to the legal issues:

Taobao.com, China’s largest online trade platform, has accused those protesting the platform of being illegal merchandisers that had been punished by the platform, a spokesman for the platform said at a news conference on Monday afternoon in East China’s Zhejiang province.

The online and offline attacks were triggered after the platform announced that it would quintuple its service fees starting in October. The protests began with small sellers attacking big sellers. The protests escalated when 200 sellers protested at the Taobao.com headquarters in Hangzhou, the capital of Zhejiang.

A few different issues have been floating around this story. First, did Taobao have the right to raise fees in this way? Although it is a private company, there are laws in China that govern pricing decisions, including the Consumer Law and Anti-monopoly Law, so there is definitely a role here for government to play. Whether Taobao violated any relevant law with respect to pricing has not yet been determined.

I do not know enough to offer a solid, informed opinion, but from the limited facts that have been circulated by the media, I’m not sure what the problem is in terms of pricing. Maybe there’s more going on here?

Second, how should operators of sites like Taobao deal with issues like product quality and counterfeit goods? Thus far, the legal system here as a whole has leaned in the direction of “Notice and Takedown” policies. Essentially, if a site has an adequate internal policy that allows rights holders or other complainants the ability to notify Taobao of a certain problem, and if Taobao responds to these notices in a timely fashion, then the courts will most likely consider that to be an adequate response.

However, there must be balance between protecting the rights of brand owners and consumers, on the one hand, and merchants who utilize Taobao’s services on the other. Under what circumstances will products be removed from the site? When will merchant accounts be cancelled? What will Taobao do to verify complaints?

Taobao, and similar sites, already have their Notice and Takedown policies in place, but the answers to the above questions are still being worked out. Moreover, future civil litigation (and judicial guidance) will definitely help to shape what an adequate policy should look like.

In the meantime, the protests have taken a turn for the theatrical:

A group of online merchants operating on Chinese e-commerce platform Taobao, a subsidiary of Alibaba Group, set up a “mourning hall” for the group’s very-much alive chairman Jack Ma in Hong Kong on Sunday to protest the online sales platform’s new service terms.

A total of 19 protesters gathered at an anti-Taobao protest in Hong Kong’s Times Square on Sunday, setting up a mourning hall centered around a portrait of Alibaba chairman Jack Ma.

As Billy Joel once wrote, “Melodrama’s so much fun. In black and white for everyone to see.” But what do these guys want exactly? And how are they going to get satisfaction? Here’s a clue:

[O]ne of the Hong Hong protest organizers named “Laozhou,” a merchandiser who was also an organizer for the online attacks, sold substandard products from his shop in Taobao.com and his shop was closed by the platform in October.

Laozhou confirmed with Xinhua that he was among the organizers of the “Anti-Taobao” parade. “My products were indeed without washing tags, but it’s up to the government to decide whether my shop should be closed.”

This brings us, therefore, to the third issue: what’s the proper role for government regulators here? Our friend Laozhou suggests that the government should ultimately make decisions about whether a merchant is removed from Taobao.

This guy must be high on goofballs. Jurisdiction and legal scope aside, let’s consider the practicalities here. There’s a reason why the law in many countries now recognizes Notice and Takedown as adequate responses to online infringement, counterfeits, etc. The high volume of transactions on these platforms makes it impossible for either the government or the operators to perform any sort of verification. Moreover, due to high deal volume, the government simply cannot step in and adjudicate in each instance.

Therefore Laozhou’s implication that the government has an adjudicatory role here is simply unworkable. If this were attempted, the flood of cases would mean that brand owners and consumers would have lengthy waits before receiving a hearing. The issue of transaction costs for complainants is another issue; seeing as how many of these deals are low value commercial transactions, any kind of filing fee would most likely discourage a large number of complainants.

But of course, many online merchants would be quite pleased if the system didn’t work efficiently. If the government was involved, everything would be more expensive and much, much slower than the current system adopted by Taobao. This would benefit merchants at the expense of consumers.

It seems as though the protesters are left with a possible complaint about pricing (i.e. the fee hikes) but little else to rail against. Notice and Takedown is already firmly in place in China law, and the protesters are all alone on this issue, fighting not only against Taobao, but also consumers and brand owners. A lonely position to occupy.

I don’t think the theatrics are going to win the day this time.

© Stan for China Hearsay, 2011. | Permalink | 4 comments | Add to del.icio.us
Post tags: Alibaba, copyright infringement, counterfeits, e-commerce, Internet, notice and takedown, pricing, safe harbor

This has been anticipated for some time, although aside from the so-called Real Name, or Real ID, registration system for users, no one really knew what else might be tossed into a new set of rules designed to regulate microblogs. There are still a lot of questions left to be answered as to how this new set of rules will be interpreted and enforced (welcome to the world of a China lawyer, folks), but the text does tell us a few things.

First, let me throw out a few links for you:

The text itself, in Chinese only at this point, from Xinhua: 北京市微博客发展管理若干规定

If you’re looking for commentary in Chinese, you probably already know where to look. However, you can start with this article on Sina, and you can always cut and paste the title of the law into Baidu, and you’ll get lots of other news stories and links to video.

For English-language news and commentary, start with “New Microblog Controls” over at China Media Project, which also has some translated bits of (I think) the Sina article I linked to above. You can then go on to the usual suspects, including China Daily and this brief announcement in Global Times, plus this placeholder by Bill Bishop/DigiCha and this post by Kai Lukoff on iChinaStock (expect more from both Bill and Kai on this topic in the future).

I only have a couple of comments at this point. For one thing, I’m a bit unclear as to why this set of rules was issued by the Beijing government (and several municipal agencies) as opposed to State-level authorities. To be sure, Beijing is so big and important that these rules will, I assume, set the de facto standard for the entire country.

So that’s not so important at the end of the day, but I am curious. I’m sure someone in the know will discuss the issue at some point. Note that the rules themselves do not address the obvious jurisdictional questions, which again is odd given that the Internet is not exactly bound by municipal geography.

Additionally, and what is getting the most press, is the Real ID provision. In the most simple terms, this will mean that users will have to register using their ID numbers; failure to do so would mean no access to microblog services. Again, this is the part that everyone knew was coming.

What’s perhaps more interesting is that these rules not only set out what users shall not do (the usual list, including violating State security, inciting illegal assembly, etc.), but also provides for a new licensing procedure for microblogs.

This is not without precedent with respect to new technologies/businesses that the government has decided require more attention. For example, video file sharing sites had been in existence for some time before 2007/8, when the government stepped in and imposed a dedicated licensing system.

The content management provisions in the new rules are not really new, just a codification of what was already out there in terms of “self-regulation.” So why the need for a licensing system? It gives the government a new regulatory tool and puts the microblog operator in the position of needing an affirmative nod from the relevant officials.

In the absence of a licensing system, interaction between the government and operators would be limited to periodic content management issues or when the operator/users violated existing content rules. However, with a licensing system, operators must go to the government, hat in hand, and in effect prove that they have been following the rules and have the proper internal tools in place to handle content management. The difference may seem subtle, but in reality, this changes the relationship significantly. Obviously, the ability to withhold or delay a license (or license renewal) is a very useful weapon in the regulatory arsenal.

I don’t have any other comments at this point. While I’m sure there will be additional commentary out there on the specific language of the rules, I find it to be full of the usual politico-legal boilerplate and not very illuminating.

We’ll have to wait and see how this shakes out with enforcement and additional details (e.g. implementing rules).

Have a good weekend!

© Stan for China Hearsay, 2011. | Permalink | 3 comments | Add to del.icio.us
Post tags: Internet, microblog, Real ID, sina, Weibo, 北京市微博客发展管理若干规定

Just to be clear at the outset, this is total speculation on my part. I have no evidence at all whether this move by SARFT is linked in any way to the recent moves by China’s government to reform cultural industries, tighten up on Party messaging, keep an eye on Net discourse, etc. For a comprehensive look at these issues, start reading China Media Project on a regular basis. You can start with this excellent post.

SARFT is the State Administration of Radio, Film and Television, one of the big media regulators here. They’ve been rather active these days on the television side, including chopping advertisements for drama shows. Here’s the latest:

China’s top broadcasting watchdog has banned the TV shopping programs of 19 companies from screens after they were found to have less registered capital than the minimum amount required for such programs.

The registered capital of those companies range from 1 million yuan($157,480) to 5.08 million yuan, less than the required amount of 10 million yuan, read a circular recently posted on the website of the State Administration of Radio, Film and Television (SARFT). (Xinhua)

OK, what exactly is going on here? On its face, this move by SARFT is a follow-up enforcement action to a rule put in place in 2009 requiring these companies to have certain minimum registered capital. In China, companies are required by law to have a certain amount of capital (cash, assets) when they are established. The cash/assets often vanishes very shortly afterward, but at least it’s there at the outset. This is supposed to minimize business risk and discourage fly-by-night operators.

China will often use registered capital as a way to raise barriers to entry in a given market sector, hoping that this keeps the less serious, irresponsible folks on the sidelines. Theoretically, it also minimizes risk to creditors, but you shouldn’t take that too seriously.

In the case of TV shopping programs, the companies were told to raise their registered capital to RMB 10 million. Why are these companies so special? In the past, there have been many problems with fraud, misleading claims and other shady practices.

TV shopping programs are sometimes used by fraudsters to sell shoddy products. Commercials for drugs, medical equipment and health supplements for sexual enhancement used to be rampant on China’s screens.

While Chinese urban residents are more wary of these TV programs due to constant exposure, TV shopping is relatively novel for people in rural areas.

In other words, the new requirement in 2009 was a consumer protection move. But what about the enforcement action?

There is an interesting regulatory issue here (well, boring to most people, fun for me) regarding jurisdiction. The agency in charge of monitoring registered capital payments is the Administration of Industry and Commerce (AIC). These are also the guys that handle all companies’ annual inspections. Theoretically, if companies are not up to date with registered capital payments, they can face orders, fines and even revocations of their business licenses from AIC.

So why isn’t the AIC involved here? The reason is that these companies (probably) paid in all their registered capital upon establishment and only later were subject to these new rules by SARFT. I would question whether something like this was on AIC’s radar when they performed these companies’ annual inspections in 2010. I suspect that this issue didn’t come up at all during that process.

Another way to look at this is that payment of registered capital is usually a corporate law and governance issue handled by the AIC. However, the 2009 SARFT rules was a narrow regulation applicable to certain companies in the television sector, not an area where AIC has any direct jurisdiction. So even though this involves registered capital, it has nothing to do with whether these companies had met their obligations under, say, the PRC Company Law. The only violation would be of the new SARFT rules.

These companies therefore are in no danger of being shut down by the AIC, just being kicked off the air by SARFT. Legally speaking, we are dealing with apples and oranges.

Sorry, you’re probably asleep at this point. Pleasant dreams . . .

For the rest of you stalwarts, the question remains why SARFT chose to return to these 2009 rules with this special enforcement action. China’s government agencies do not always engage in these sorts of campaigns, and so we have to question why SARFT is paying so much attention to these shopping programs.

This is where my speculation comes in. One possibility is that this is exactly what it looks like, a follow-up to a consumer protection rule in an area deemed important by some bureaucrat somewhere worried that senior citizens were being taken advantage of by TV hucksters.

Maybe. Also possible, though, is that this is part of China’s new “cultural system reforms.” If the government believes that taking advertisements out of television dramas is a necessary move, then the crackdown on TV shopping shows might be cut from the same regulatory cloth.

I think we’ll be able to test this one. According to news reports, SARFT will officially allow these guys back on the air once they have met the registered capital requirements. Let’s wait and see how many pay in and whether they are indeed welcomed back to television. If this is consumer-driven, then I would expect to see some of these firms allowed back fairly soon, but if this is about cultural reforms (i.e., this is all a pretext), then these guys might be gone for a while.

As usual, if anyone has the inside scoop on this, please let us know in the comments or drop me an email.

© Stan for China Hearsay, 2011. | Permalink | No comment | Add to del.icio.us
Post tags: culture, SARFT, television shopping