In the latest battle against cultish beliefs, the city is bringing a campaign into communities, turning families into the new beachhead in its war on heresy.

Beijing will focus work on promoting the “families say no to cults” campaign in the city’s “anti-cult educational month,” according to a press release-like article in yesterday’s Beijing Evening News.

The anti-cult month started yesterday, said the director of the secretary’s office of Beijing Anti-Cult Association (BACA), who asked to be identified only by his surname, Pang. BACA is a nongovernmental organization undertaking the campaign on behalf of an anti-cult arm of the municipal committee of the Communist Party of China (CPC).

BACA handed out more than 100,000 brochures yesterday to community representatives at a launch ceremony of the new campaign in Fengtai district, Pang told the Global Times. These materials urge the readers to walk away from cultish teachings, Pang said.

An anti-cult official at the municipal committee of the CPC declined to comment yesterday.

The Chinese supreme court defined a cult organization in 1999 as any group that manipulates its followers based on superstition and deification of its leader. A cult is also carefully distinguished from the orthodox forms of religions.

BACA sounds like a great organization. I should do some research on it but will need to be careful not to confuse it with “vaca.” I bet they get that a lot from their Spanish-speaking members.

By the way, I admonish in advance any readers who plan on writing snarky comments about that SPC definition and personality cults. I know what you’re thinking. Just don’t give in to temptation. Remember, it’s not JUST about deification of a leader, but also based on superstition — keep that last point in mind.

I wonder if Mormons fall within that definition? Zoroastrians? Jedi Knights?

Oh, and regarding this bit:

“Chinese history is no stranger to heretic speeches that bewitched followers and incited disorder, and governments of past dynasties all punished cults,” read a copyrighted article on the website of China Anti-Cult Association.

I would just like to say that there’s no need to get defensive about all this. If the government would simply admit that there’s no difference between a “cult” and an “orthodox religion,” I’d run out immediately and join BACA so we can join together and end all this nonsense.

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I fabricate, you decide.

Dateline: tomorrow – - Following the formal announcement of the launch of Baidu’s cloudish smartphone, which follows similar moves by every other incorporated business entity in the People’s Republic of China, including that guy on the corner selling “lamb” kebabs, the government has decided to stop messing around with its bloated domestic security budget, cut out the middleman, and jump into the market directly.

Enter the Little Red Phone®, a joint project between the powerful Ministry of Public Security and the secretive Information Sequestration Bureau (so secretive, many would argue that, à la Keyser Söze, it doesn’t even exist).

[Editorial note: when performing research for this post, China Hearsay was urged by government liaison officers to discontinue use of the acronym "ISB" when referring to the Information Sequestration Bureau on account of the agency's ongoing trademark dispute with the International School of Beijing.]

Why is the government taking this unprecedented step? Bi Ming (笔名), Professor of Epistolary Literature at Miskatonic University, has reviewed several unpublished white papers drafted by China’s security officials:

You have to understand that the security business is expensive. In addition to all that technology and personnel, the sheer number of man hours it takes to keep tabs on everyone is mind boggling. Just in the mobile sector, there are so many different service providers, hardware manufacturers, and distributors to deal with, and that doesn’t even take into account data mining. The resources just aren’t available any more. However, if they provide the software and the hardware, and distribute the product themselves, all those information supply chain issues simply melt away. They would be stupid not to do it.

After the July 2011 announcement that music sensation Lang Lang would soon release a rhinestone-encrusted smartphone with a fold-out piano keyboard (industry insiders refer to the peripheral device as the “10-inch Pianist”), there was a great deal of soul-searching in Beijing. If Lang Lang can do it, officials ultimately decided, it’s almost embarrassing that we are not in the market.

Fast forward to the first quarter of 2012, when the Little Red Phone® went into production. IT news site Ubertechnik reported last month that the initial release will include the standard Little Red Phone® (specs include a 3.5″ Retsina Display (manufactured by the Athens-based Goat Glass), with a patented uni-core processor, 200 MB onboard memory, an RCA port, and a floppy drive), a slimmed-down “mini” phone powered by a Pentium II processor, and a high-end model, co-branded with Audi, with optional gold plating.

Zhuge Liang (诸葛亮), editor of Beijing Bytes magazine, often referred to as the smartest man in the China IT sector, thinks that the Little Red Phone® project has several built-in advantages:

Well, first, they could simply force everyone to buy it. No need for early adopters, who tend to be whiny bitches. Second, they could market the phone as the best choice for consumers worried about data privacy. If you buy a Little Red Phone®, you will know exactly how and for what reason your private information will be used. Third, obviously the floppy drive; I still have a few of those in a drawer somewhere at home that I would like to use.

No details are yet available on equipment suppliers or the operating system. Some have speculated that instead of working with a private equipment supplier, the government may rely on in-house capabilities (one of our sources mentioned a company or agency with a name similar to “Waw-Way” but refused to confirm). When that source was asked whether the operating system would be open source, he laughed at our correspondent and told him to piss off.

With the anticipated roll-out of the Little Red Phone®, rumors about a possible Little Red Tablet have already begun to percolate through the Intertubes. While it it doubtful that the government would use the “Little Red Tablet” name (the PRC trademark is currently owned by Proview Technology Shenzhen Ltd.), tech site Gizmodo has already announced that they have purchased a prototype device that was abandoned by a customer at Beijing’s Zhongguancun Blindman Massage and KTV Family Eatery. Details should be forthcoming shortly.

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FYI, when I use the term “formalism” when talking about Chinese law, I’m not really using it the right way. My general meaning is that the system here tends to be overly bureaucratic and technical, and that folks can easily be tripped up by the minutiae, the specific, formal rules that often must be followed before a task can be accomplished. And unfortunately, there are lots of bureaucrats here that sit back and wait for you to make that one minor, albeit fatal error, that allows them to dump your application/complaint/petition in the trash.

In other words, the system can appear from the outside as rule-based, technical and quite formal — hence my use of “formalistic.”

“Legal formalism” on the other hand, is a different kettle of fish. Here’s some nice gibberish from Wikipedia that actually does describe the jurisprudence side of this fairly well:

The most obvious characteristic of legal formalism is the purported separation of legal reasoning (or “application” of norms to facts) from normative or policy considerations. The “formalist fiction” is that the process that produced the legal norms has exhausted normative and policy considerations; accordingly, law can be seen as a more or less “closed” normative system.

To simplify, a system based on legal formalism leaves the normative issues to the legislature, while the judge is there to just apply law to facts, or referee that process. The judge is not there to deal with policy or to worry about normative issues.

The role of judges in China is obviously quite different, as they have tremendous discretion and are expected to take policy considerations into mind when making rulings, albeit in a very conservative fashion. Therefore the process might be technical, bureaucratic and formal, but “legal formalism” does not accurately describe China’s legal system. (Just wanted to clarify that in case I have any confused lawyers reading this.)

One of those maddening technical rules we deal with here relates to defendants and identity. I have been involved in cases where defendants cannot be found and judges are unwilling to do more than try calling a defendant’s mobile number — when that fails, the case is put in permanent stasis, instead of going with some sort of constructive notice or proceeding to a default judgment, which would happen in many other jurisdictions.

Imagine running across this problem when you’re faced with an online tort like defamation. Someone has bad-mouthed your company, for example, on a microblog, and all you know about that person is their username (e.g. “leifeng88″ or “hellokitty4ever”. Matching up that username with a warm body will be difficult at best, if not impossible, and that’s assuming the judge is willing to help. In many cases, the user information kept on file by the microblog service will be incomplete or even false. This is one problem, by the way, that Real ID systems are designed to fix, among other things.

Jiangxi Province is fighting back against technical rules that would stop such a defamation action in its tracks:

In the past, it would have been unthinkable because defendants’ true identities are required in a trial according to Chinese law or else courts will not accept the cases.

But now online violators in East China’s Jiangxi province can be sued first based on their virtual identities, such as their nickname on QQ, an instant communication tool.

[ . . . ]

The judges help the plaintiff find violators using virtual names first and then confirms their real identities after the court has accepted the case[.]

Cool. I still remember when judges wouldn’t lift a finger to help a plaintiff locate a defendant, discover documents, or order preliminary injunctions, so this kind of activism is a huge change. Moreover, with the number of online defamation and copyright infringement suits filed these days, it makes sense that the judiciary is looking for better ways to process these cases.

Now, I know what you’re thinking. This is yet another example of “The Man” stifling free expression and putting his proverbial boot on the neck of well-meaning anonymous microbloggers. Well, maybe there is some of that going on, but I don’t think that’s what this is all about. We’re not talking about a whistle blower who posts something embarrassing about the local Party official and then is invited to have a cup of tea with the neighborhood PSB. In Jiangxi, these are civil court judges responding to civil tort complaints. To the extent that this pilot program streamlines that process, I’m OK with that.

All in all, this appears to be a step in the right direction. At the same time, though, I can’t help but think that if the government-mandated Real ID system was actually implemented, none of this would be necessary. But apparently that isn’t going to happen anytime soon.

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Post tags: civil procedure, copyright infringement, defamation, Internet, litigation, microblog, online torts

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The answer of course is that they can’t. News Corp is not exactly purchasing equity in a company that holds those licenses, but rather investing in a Cayman Islands holding company that owns several entities in China that have, in turn, contractual relationships with the PRC-national-held entities that have the licenses. If you are a regular reader of this blog, you’re already thinking VIEs (variable interest entities). And you’d be right, that’s exactly how Bona Film Group is structured and how it is able to tap into offshore equity markets.

Nothing new here, but my curiosity was piqued, so I looked up the prospectus Bona filed in 2010 and looked around for VIE language. I’m always fascinated with how companies disclose this risk, which reflects how far their legal counsel is willing to support the structure. The document in question can be accessed here.

(Note: Everything that follows is based on the 2010 document. I did not perform extensive research on subsequent filings and am assuming that Bona has not substantially changed its structure since that time. Even if it has, my main point here is to discuss the language it used at the outset to disclose its setup, and nothing more.)

Since I’ve written about the inherent risks of VIE structures countless times (do a search on this blog), I won’t go over the same issues once again. Instead, I’ll just do some cutting and pasting, as an example of what some of this language looks like — sorry for the length of this post, but I thought a liberal use of the original language was the best way to do this. I am happy to say, by the way, that after reading Bona Film Group’s approach to this regulatory risk, I believe that their legal team has done a fine job. This despite the fact that I am very conservative on this issue and tend to be rather tough on risk disclosure verbiage.

So what does this sort of thing look like? In the prospectus, we first come across VIE (they don’t use that term, by the way) in the summary, in the section entitled “Our Challenges.” The two relevant line items are as follows:

• government controls and regulations in the film, television, talent agency and advertising industries; and
• our corporate structure based on a series of contractual arrangements in order to comply with applicable PRC laws and regulations.

Of the two types of risk, the first encompasses much more than simply the VIE corporate structure, while the second is a specific reference. I suppose I could quibble with the assertion that the VIE structure is being used to comply with PRC law instead of what is really going on, that the VIE is a tool used to (arguably) violate PRC foreign investment regulations, but in light of subsequent language, let’s not go there.

In the “Corporate Structure” section, we get a detailed description of what’s really going on with Bona Film Group, including everyone’s favorite, a corporate structure org. chart. More interesting to me is this language, which sets out how and why the VIEs are being used:

We operate our businesses in China through our affiliated consolidated entities and their subsidiaries due to PRC regulations that prohibit or restrict foreign investments in the film, television and talent agency industries and impose qualifications for foreign investors in the advertising industry. We have three affiliated consolidated entities in China that operate our businesses in China, each of which is an entity duly formed under PRC law. We are subject to various risks relating to our corporate structure. For example, there are uncertainties regarding the interpretation and application of the relevant PRC laws, rules and regulations. If a PRC government authority determines that our corporate structure, the contractual arrangements underlying our corporate structure or the reorganization we undertook to establish our current corporate structure violate any applicable PRC laws, rules or regulations, the contractual arrangements may become invalid or unenforceable, and we could be subject to strict penalties and be required to obtain additional governmental approvals from the PRC regulatory authorities. In addition, the contractual arrangements may not be as effective in providing operational control or enabling us to derive economic benefits as ownership of controlling equity interests. [my emphasis]

This is pretty good stuff. Yes, there are uncertainties about the relevant law here, so that’s fine. And indeed, the government could declare the contractual arrangements invalid, which is one of the most significant risks of using a VIE structure. So far, so good.

Before we get to the main VIE section, one quick digression. In a section devoted to key personnel, I found this little nugget on page 17:

Although certain of our executive officers, including Mr. Dong Yu, have entered into a confidentiality and non-competition agreement with us regarding their employment, disputes may arise between our executive officers and us, and, in light of uncertainties associated with the PRC legal system, these agreements may not be enforced in accordance with their terms.

As it turns out, News Corp. purchased/will purchase its shares from Dong Yu, who is the CEO. He is the guy running the show, and obviously a dispute with him would be a huge problem. I’m not entirely sure what kind of disputes this paragraph is addressing, or what legal uncertainties are relevant. However, as we know from other VIE cases, such as GigaMedia and ChinaCast Education, the guys that control the license-holding VIEs are indeed key personnel that are a source of tremendous potential risk.

By the way, the “key personnel” section is just one of many risk areas highlighted in the prospectus. If you’re familiar with this kind of language, or this sort of document, and have never seen one for a China-based company, you might want to give it a quick read. I have a feeling that the sheer breadth of risk areas might startle folks that have little experience with China business or law. Moreover, it also tells you something about investors and their tolerance for risk when it comes to China firms.

Most of the VIE language is in the section “Risks Relating to Our Corporate Structure” beginning on page 32. There is quite a lot here, including some overlap of the information from the summary I already mentioned. The structure itself is summed up with this:

[O]ur business in China is operated by our affiliated consolidated entities and their subsidiaries through contractual arrangements with our PRC subsidiary. Each of our affiliated consolidated entities and their subsidiaries is currently owned by PRC citizens and/or PRC companies and holds the relevant licenses and permits to provide film production, distribution or exhibition, television production, talent agency or advertising services in China. The shareholders of our affiliated consolidated entities are set forth in “Our Corporate Structure.” We have been and expect to continue to be dependent on affiliated consolidated entities and their subsidiaries to operate our film production, distribution and exhibition, television production, talent agency and advertising businesses. We do not have any equity interest in any of the affiliated consolidated entities but control their operations and receive substantially all the economic benefits and bear substantially all the economic risks through a series of contractual arrangements.

Again, this is good language. Not only is it a clear, accurate description of the structure, but the future-looking bit is spot on as well. For me, the basic legal issue has always been whether the contractual agreements are enforceable, and this issue is addressed with this language:

There are uncertainties regarding the interpretation and application of current and future PRC laws, rules and regulations, including but not limited to the laws, rules and regulations governing the validity and enforcement of our contractual arrangements with the affiliated consolidated entities and the laws, rules and regulations setting forth the prohibitions or restrictions on foreign investments in the film, television production, talent agency services and qualification requirements for foreign investments in advertising industries. Although we have been advised by our PRC counsel, Han Kun Law Offices, that the structure for operating our business in China (including our corporate structure and contractual arrangements with the affiliated consolidated entities) complies, and immediately after the completion of this offering will continue to comply, with all applicable PRC laws, rules and regulations, and does not violate, breach, contravene or otherwise conflict with any applicable PRC laws, rules or regulations, we cannot assure you that the PRC regulatory authorities will take the same view.

This is the only bit that I disagree with, although it’s certainly no worse than other disclosures I’ve seen, and better than some. Personally, I’d never want my name associated with the blanket statement that the structure complies with all applicable PRC laws. I don’t believe that it does, or at the very least, there are substantial doubts about such validity. But there are a lot of lawyers, and law firms, out there that hold a differing opinion. And anyway, the final phrase there, which admits that officials may disagree, is a saving grace.

But what about the specific risk here? It’s all well and good to disclose that the government might find this structure invalid, but what does that mean to the company? Additionally, what about the GigaMedia scenario where the VIE owner violates the agreements? Again, this is addressed in the prospectus head on, with the following:

[U]nder the current contractual arrangements, as a legal matter, if any of the affiliated consolidated entities or any of their shareholders fails to perform its, his or her respective obligations under these contractual arrangements, we may have to incur substantial costs and resources to enforce such arrangements, and rely on legal remedies available under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective. For example, if shareholders of an affiliated consolidated entity were to refuse to transfer their equity interests in such affiliated consolidated entity to us or our designated persons when we exercise the purchase option pursuant to these contractual arrangements, we may have to take a legal action to compel them to fulfill their contractual obligations.

If (i) the relevant PRC authorities invalidate these contractual arrangements for violation of PRC laws, rules and regulations, (ii) any affiliated consolidated entity or its shareholders terminate the contractual arrangements or (iii) any affiliated consolidated entity or its shareholders fail to perform their obligations under these contractual arrangements, our business operations in China would be adversely and materially affected, and the value of your ADSs would substantially decrease.

Not bad. If the holders of the VIE make trouble, legal action will be messy and expensive, and it might not even work. Absolutely true, and the equity transfer example is a good one to use. This language is coupled to a further section on page 34 that deals with the potential for these equity holders to have conflicts of interest with the company.

OK, I think this post is long enough. It is useful to see how some of these legal issues are actually handled in formal documentation. Although the Bona Film Group documentation is not perfect, it’s really quite good. Their legal team did a very good job vetting this tough area of PRC law and translating it into (mostly) accurate and readable disclosure language.

I don’t know if News Corp made a good deal or not with its investment, but in terms of risk disclosure, they certainly know what they’re getting into when it comes to the VIE issue.

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Post tags: Bona Film Group, corporate structure, News Corp, VIE

If you recall, the origins of all this are shrouded in the mists of time 2007, when the U.S., unhappy that China had failed to live up to its WTO commitments regarding the film industry, filed for dispute resolution. The U.S. claim involved the following issues:

On 10 April 2007, the United States requested consultations with China concerning:  (1) certain measures that restrict trading rights with respect to imported films for theatrical release, audiovisual home entertainment products (e.g. video cassettes and DVDs), sound recordings and publications (e.g. books, magazines, newspapers and electronic publications); and (2) certain measures that restrict market access for, or discriminate against, foreign suppliers of distribution services for publications and foreign suppliers of audiovisual services (including distribution services) for audiovisual home entertainment products.

• Regarding trading rights, the United States seeks consultations on various Chinese measures that reserve, to certain Chinese state-designated and wholly or partially state-owned enterprises, the right to import films for theatrical release, audiovisual home entertainment products, sound recordings and publications;
• Regarding distribution services, the United States seeks consultations on various Chinese measures that impose market access restrictions or discriminatory limitations on foreign service providers seeking to engage in the distribution of publications and certain audiovisual home entertainment products.

The case was mostly about the ability of foreign enterprises to get involved in the importation and distribution of certain audiovisual products in China. According to the U.S., which won the case, China had promised when it joined the WTO to open up this sector to foreign investment. After the U.S. victory, we had a “What the heck is going on?” period where the two sides were struggling to find a way to settle.

Looking back on this, I now have to admit to being a bit naive. I figured that the U.S. would hold China’s feet to the fire and persist in demanding implementation of the promises made when China joined the WTO; this would include opening up the import and distribution markets to foreign firms. I further assumed that the reason for the delay was that China needed to figure out how they would handle the implementation while maintaining the legal processes surrounding content review, quotas, etc.

Silly me. I forgot Rule #1 of international trade policy: it’s not about law, it’s about trade. No one really cares about film distribution and importation per se. The Chinese care about controlling the sector, and the Americans (i.e. the big film studios) just want the best deal they can get.

To my credit, when the deal was announced back in February, I did note my suspicions:

I find it interesting, though, that no one seems to be questioning whether the settlement actually fixed the defects identified by the WTO. Seems to me like it doesn’t. As to imports and distribution, will foreign firms now be able to get into that business? The USTR language is far from clear, saying that the deal:

[S]trengthens the opportunities to distribute films through private enterprises rather than the state film monopoly[.]

[E]nsures fairer compensation levels for U.S. blockbuster films distributed by Chinese state-owned enterprises[.]

Seriously, what does this mean? Which private enterprises? How will they be approved and who can qualify? Why do I feel like this issue is being swept under the carpet now that the major film studios got a few concessions?

Thanks to Don Clarke, I can now say that it appears as though my suspicions were well founded. While we still do not have the formal language in the bilateral Memorandum of Understanding, the Joint Communication filed with WTO tells us plenty. It essentially is a description of the deal between the U.S. and China, consisting of five points:

1. China will continue with the 20-film import quota but will allow in additional “enhanced format” films.

2. and 3. These points concerned commercial terms for film distribution agreements, including revenue sharing issues.

I’m going to quote points four and five verbatim since these concern the actual legal issues from the WTO dispute:

4. China confirmed that any Chinese enterprise is eligible to apply for and be granted a license to distribute imported films and that nothing in China’s laws, regulations or government rules prevents any eligible Chinese enterprise from applying for and receiving a license to distribute, and operating as a distributor of, these films.  China further agreed that it will promote reform in the distribution of imported films and will actively encourage more Chinese enterprises, including private enterprises, to obtain licenses and to participate in the distribution of these films.

5. China agreed that the licensing of distributors would be conducted in a non-discretionary and non-discriminatory manner, that contracts for the distribution of imported films would reflect standard industry practices, and that other Chinese government policies or practices would not undermine the provisions of the Memorandum of Understanding.

Point six said that the two sides would revisit all this in five years’ time, which is laughable on its face.

OK, do you see anything interesting in that list of key elements concerning the ability of foreign firms to engage in film importation? Take a close look now.

Having trouble? Well, no surprise, because that issue was dropped entirely from the discussion, even though the WTO said that China was in violation of its Accession Protocol in keeping that sector closed. Apparently the U.S. entertainment industry, happy with the deal they got, agreed to drop that demand.

What about the other major issue, that of foreign firms engaging in film distribution? Take a close look at points four and five above. Are you laughing? I agree with you, that language surely is hilarious. Have the Chinese agreed to allow foreign companies to distribute films? Not even a little bit.

Will China be forced to approve requests from private Chinese companies for distribution licenses? Ha ha. According to that language, all China has to do is “promote reform,” “encourage” companies, and license firms in a “non-discriminatory manner.” Oh my, you could drive a very large truck through those loopholes. Why did they even bother with points four and five? It’s almost as if that language was just stuck in there for cosmetic (political?) reasons, even though the negotiators on both sides knew it was complete dreck. Nah, they wouldn’t do that, would they?

Look, I’m not an executive at a big film studio, so I’m not going to say which side “won” this dispute. Maybe with the relaxation of the import quota and the new revenue sharing deal, the studios figured they would make so much money that it was worth it to essentially give up on the legal issues that began this whole thing five years ago. Perhaps they’re right.

But I have to say, after writing about this case for so many years, learning the underlying law and reading countless pages of legalese gibberish, I am more than a little disappointed that the core issues everyone was fighting about were so easily thrown under the bus by American industry.

I need to stop being so naive. This was never about the law. It was about entertainment companies making money. They found an issue to win on, and they successfully used it to wring market access concessions out of China. Problem solved. Both sides can live with the results.

I so need to get a life.

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Post tags: audio visual products, world trade organization, WTO

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The latest inanity relates to the ICBC purchase of a controlling interest in the Bank of East Asia, as well as approval of additional branches for some other PRC banks. Senator Bob Casey of Pennsylvania is apparently losing sleep over this deal and wants the Federal Reserve to explain itself:

A Federal Reserve decision to let Chinese banks acquire U.S. lenders was challenged by Senator Bob Casey, who said it could open the way for Chinese government-run institutions to undercut U.S. banks.

“I worry that these banks and their U.S. subsidiaries will use their state support as a way to underprice U.S. banks,” Casey, a Pennsylvania Democrat and chairman of the Joint Economic Committee, said in a letter yesterday to Fed Chairman Ben S. Bernanke.

OK, you might be thinking that Casey is someone who should be held up as a role model. I mean, it’s rather impressive that a high-functioning person with Down Syndrome could actually get elected to the U.S. Senate.

I know it’s easy to fall into that thinking, but I would caution you against it. Casey is not at all stupid, he just represents a state that has lost a lot of manufacturing jobs, and the folks he represents (and the labor unions that support him) blame China for their troubles. Casey doesn’t give a rat’s tushee about Chinese banks. He is, however, very interested in scoring some cheap points as he rails against fictitious Chinese subsidies.

FYI, if you’re still slightly nervous about China’s banks coming to get you, read “Five Reasons China’s Banks Are Not Taking Over The U.S. Banking System” in Forbes. It’s pretty simple. And by the way, after the gazillion dollars of free money that the Fed gave to U.S. banks in the aftermath of the 2008 recession, I don’t think America’s hands are clean enough to criticize financial institution subsidies.

You know, come to think of it, if Beijing did decide to subsidize ICBC, allowing it to build up market share in the U.S. with more favorable rates on the retail side of things, I might actually welcome it. I mean, after all that free money given to them by the Fed, U.S. banks still shit all over their retail customers and still don’t lend enough to small business.

No, I really don’t think we have anything to fear from the Chinese banks.

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Post tags: banking, Federal Reserve, ICBC

Latest case in point: another excellent column by trade guru Dan Ikenson, writing in Forbes. Ikenson’s topic du jour is the Trans-Pacific Partnership (TPP), a U.S. trade initiative that some, most certainly including Beijing, see as part of a China containment strategy. But put aside the China angle for a moment and consider the issue of whether Japan should join. Ikenson takes us through the US Trade Representative notice and comment process to set the stage, noting the following:

1. USTR received 115 comments from interested parties regarding whether Japan should be in the TPP.

2. Five submissions rejected the idea.

3. Five submissions said OK, but with conditions.

4. One hundred and five offered unequivocal support to the idea.

So support for Japan joining the TPP was, as Ikenson points out, 91%. Surely then the Obama administration would move forward with all due speed, having been given the green light from the “public”?

Ha ha. That’s where the story gets interesting. In fact, the U.S. government has been moving quite slowly. Someone must have put the brakes on this deal. I wonder how we can find out?

Ikenson looked at the five negative comments sent to the USTR for a clue. The commenters were: Humane Society International, the National Marine Manufacturers Association, the Maine Citizen Trade Policy Commission, the Central Union of Agricultural Cooperatives, and the American Automotive Policy Council. Hmm. Would it help if you knew that the last one there on the list was the lobbying group of the big three auto manufacturers?

So these auto companies are obviously throwing their weight around because of competition from Japan. Ikenson also posits that the Big Three are balking at this to curry favor with China. I have no idea which one is more plausible, so I’m not going to opine on that issue.

What’s more interesting to me is the editorial comment Ikenson includes about the whole process and what it says not only about trade policy, but also about government in general. Apologies for the length of the quote, but it’s necessary:

[I]t is to be expected that companies will respond to incentives and if policy is perceived as malleable, the incentive to influence favorable outcomes will motivate companies to lobby.  And as entities beholden to the fiduciary duty to maximize profits for shareholders, these companies try to influence the rules to their own advantages.  But who’s watching over the henhouse here?  Policymakers have a responsibility to the public interest, not to specific industries or companies.

What is proper, democratic, or civic-minded about U.S. policy formulated with the views of a few politically-favored companies – companies that are lobbying foreign governments on some of the very same issues – trumping the opinions of a diverse 91 percent of respondent interests?  If the goal of trade policy is to deliver the benefits of trade liberalization to a broad cross-section of Americans, then why is there this egregious imbalance of influence on the process? What is the point of collecting comments from the public on such matters, if not just to create the illusions of policy accessibility and transparency?  The whole exercise renders trade policy indistinguishable from corporate welfare and gives trade a bad name.

Keep in mind that Ikenson works for The Cato Institute, a libertarian think tank, and that his views on free trade are not exactly lauded by folks on the political left in the U.S. And yet, here he is coming out sounding like an Occupy Wall Street activist, or perhaps the Tea Party, criticizing crony capitalism and the influence of corporate money in trade policy.

One reason I like the quote is that Ikenson is not laying this at the feet of the corporations but at government. This is my position as well. Companies will do what’s best for them, and that’s OK. It’s the responsibility of the government, working on behalf of the public, to prevent those corporate interests from controlling policy making. In other words, the corporations are not “evil,” government is just not working properly.

Multinationals have always had a disproportionate influence on trade policy, so this general issue is nothing new. But this illustration of the limits of transparency and administrative procedure should be a reality check for all those folks working hard on rule of law and other initiatives in China. I also worry that as China’s economy continues to expand and large domestic companies get larger, their influence and power over the government here will render many “good government” initiatives meaningless.

I’ve talked to quite a few lawyers, government officials and educators over the years who firmly believe that if China were only to implement some sort of administrative system like we have in the U.S., which includes real transparency and independent judicial review, some of China’s serious internal problems could be solved. Many of these ideas have in fact been implemented here.

While I’m in favor of those goals, I have to admit that there are limits to what transparency or a notice-and-comment process can give you. Those things are great if they allow the public to influence the government. However if, as in the case Ikenson discusses, that process is basically ignored by a government that would rather cater to special interests, then what’s the benefit? At that point, all that transparency does is let us know who is screwing us over. (That is valuable information, but useless if not acted upon.)

I’m not trying to argue against transparency or open administrative procedures. These are good things, and China has made tremendous progress in the past decade, particularly with respect to the transparency requirements mandated by WTO accession. But as crony capitalism in the U.S. suggests, systemic problems with government can render tough rules and transparency totally meaningless.

A sobering thought for the weekend.

© Stan for China Hearsay, 2012. | Permalink | 5 comments | Add to del.icio.us
Post tags: administrative law, lobbyists, rule of law, transparency

© Stan for China Hearsay, 2012. | Permalink | No comment | Add to del.icio.us
Post tags: The Daily Twit

© Stan for China Hearsay, 2012. | Permalink | No comment | Add to del.icio.us
Post tags: The Daily Twit

The microblog biz has had to deal with a number of rules and regulations over the years as the government has tried to figure out just what the heck to do with this new technology. The latest round involved the “Real ID” or “Real Name” system where users (I like to call them weibots) must use their real names, verified by their PRC ID cards, if they wish to continue sending out messages and comments. Just in case a wayward weibot were to say something inappropriate or illegal, it would be relatively easy to reach out and touch that person and explain the error of their ways, perhaps over a nice cup of tea.

So what’s the new user agreement all about? Here are a few excerpts:

Article 3) Sina Weibo users may not violate presently active laws and regulations on this platform. This platform will, according to relevant laws and regulations as well as agreements with registered users, cooperate with juridical organs to protect and maintain the legal rights and interests of those whose rights are violated.

Article 5) Users enjoy the right to use Sina Weibo accounts. This right of use cannot be transferred in any way; the behavior of an account will be seen as the behavior of the registered user.

Article 6) The Site encourages users to authenticate their true identities and apply for a special symbol; the application methods and criteria for authentication are public and transparent. These kinds of users enjoy more services. The special symbols include: individual authentication, Weibo celebrity, and organization authentication, among others.

Article 7) Expression by users on this platform may not infringe upon the legal rights of others, and may not come in conflict with presently effective laws, regulations, and this agreement.

Article 13) Users have the right to publish information, but may not publish any information that:

1. Opposes the basic principles established by the constitution
2. Harms the unity, sovereignty, or territorial integrity of the nation
3. Reveals national secrets, endangers national security, or threatens the the honor or interests of the nation
4. Incites ethnic hatred or ethnic discrimination, undermines ethnic unity, or harms ethnic traditions and customs
5. Promotes evil teachings and superstitions
6. Spreads rumors, disrupts social order, and destroys societal stability
7. Promotes illicit activity, gambling, violence, or calls for the committing of crimes
8. Calls for disruption of social order through illegal gatherings, formation of organizations, protests, demonstrations, mass gatherings and assemblies
9. Has other content which is forbidden by laws, administrative regulations and national regulations.

OK, you get the idea. You can read the whole thing in English here. If you’re interested in just where they get this sort of language, you might start with what the law already mandates (e.g. the classic: “Decision of the Standing Committee of the National People’s Congress on Preserving Computer Network Security“).

The new rules are supposed to kick in on May 28.

Next question: is this a big deal? Answer: nope. As I mentioned above, China already has rules and regulation that govern online behavior, including content restrictions. What a weibot can/can’t say online is already subject to legal precepts, notwithstanding what deal that Sina has made with its users. I suppose Sina could force content rules on its users that are even more restrictive than current law mandates, but why the hell would they do that? Anyway, that’s not the case with the new user agreement.

So why is Sina bothering to do this at all? A better question is why do any online platform operators like Sina bother with user agreements. Simple, they are meant to:

1. Minimize 3rd party liability — Hey, we told our users not to do Bad Thing #37, so it’s not our fault that they did it anyway. Please don’t sue us.

2. Minimize disputes with disgruntled users — Listen, weibot, we told you not to do Bad Thing #625, but you did it anyway, so stop complaining that your account has been shut off.

3. Signal to government — Look fellas, we’re sincerely trying to follow the rules here. Please don’t fine me or put me in jail.

Sina is not trying to reinvent the regulatory wheel here, just attempting to manage user expectations, government regulations, and the interests of shareholders in this competitive sector. It’s tough out there.

If you want another opinion on why this isn’t really a big deal, the best you can do is go to Tea Leaf Nation and read Rachel’s list of “5 Reasons That Sina’s New User Contract Will Have No Impact.” After telling everyone to calm down, Rachel explains the following in detail (I’ll just whet your appetite with the barebones list):

5. This is the same term of use language on many Chinese Internet services.

4. Sina is just kicking the can. [Refers to failure to implement Real ID.]

3. User behavior does not change based on these type of agreements. Ask Facebook or Google.

2. If real name registration did not change user behavior, a user contract will not either.

1. Sina already engages in very active censorship.

If, after reading Rachel’s post, you’re still panicking and freaking out about Sina’s latest move, I suggest that you take a break from the Intertubes for a few days. Seriously, dude, you’re starting to worry me.

© Stan for China Hearsay, 2012. | Permalink | 3 comments | Add to del.icio.us
Post tags: Internet, sina, Weibo