A Review of the Fourth PlenaryLaunching judicial reform and continuing the purification of the Party

November, 2014

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OverviewForeign businesses operating in China need to understand the implications of the recent Fourth Plenary Session of the Central Committee of the Communist Party of China (CCCPC). The gathering of the most senior members of the Communist Party took place amid a deepening crackdown on corruption and enforcement of the Anti-Monopoly Law and focused significantly on judicial reform.

The full text of the “Decision on Several Important Issues Regarding the All-Around Promotion of Ruling the State According to the Law”, and the accompanying explanation by Xi Jinping, Party Secretary General and President of China, provided an overview of reforms intended to strengthen the rule of law in China, ensure better governance, support sustainable economic growth and address societal grievances. It marks another important cornerstone in Xi Jinping’s reform agenda while simultaneously reasserting the Party’s central authority and acknowledging the need to shore up the Party’s legitimacy.

The Decision continues a range of measures implemented over the last two years that push the Party to lead by example—and strips away a “do as I say, not as I do” approach. The first two years of the Xi administration have seen a consolidation of power and the launch of critical initiatives to reform behaviour.

In this note, we highlight key implications for foreign businesses, explain the nuances and provide context for the Plenary’s decisions.

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Key implications for business

The Chinese leadership’s stated goal to set the governance of the country on a more rules-based and market-oriented path could be good for foreign business in the long run. A more predictable and efficient operating environment would favour well-managed companies that understand and can adapt to the new operating environment and the expectations being placed on those that wish to operate in China—be they foreign or domestic companies.

However, the path will not be smooth and multinationals in China need to work with authorities to help them strengthen the regulatory environment rather than be seen as criticising the process from the side-lines. It is more vital than ever that foreign companies in China think about what is keeping the leadership awake at night and demonstrate a clear value proposition to authorities. Resting on the laurels of past contributions will be a risky strategy for MNCs who now need to think about how to help the government enhance its reform goals.

■ A more clearly regulated environment should mean less interference from government and local interest groups for companies but a much greater need for corporate responsibility. Companies must ensure their internal compliance systems are robust enough to withstand a much higher degree of scrutiny from authorities as the government focuses on fighting corruption.

■ Investment approvals will be streamlined as ministerial review is delegated to a local level. Reforms will be further

decentralised to provide local government more discretionary power to approve local investment projects, cutting red tape and making local engagement easier. In a loosening of restrictions on foreign investment, the National Development and Reform Commission released an updated draft foreign investment catalogue on 4th November for comment. The proposed update would reduce the number of sectors that limit foreign investment from 79 to 35 thereby removing or reducing restrictions on areas such as financial services, oil refining, premium spirits, and real estate. A key focus is on opening up manufacturing and services, and using the liberalisation to reinvigorate industries with overcapacity and outdated technology. The announcement continues China’s gradual opening and doesn’t satisfy those wishing to move to a negative list approach. The draft details 349 sectors that explicitly encourage foreign investment.

■ With a new set of operating norms increasingly governing doing business in China, personal connections (guanxi) are less important than they were, and the rise of a new set of interest groups from state owned

enterprises to entrepreneurs and foreign investors means the government is managing a more complex and competitive operating environment.

■ The big caveat to all of the above is that domestic objectives and pressures trump foreign investors’ interests. Those objectives and pressures are far reaching—from the desire to adjust the economic growth model while maintain economic growth and managing pollution to tackling social welfare challenges, addressing societal and geographic imbalances, and managing the migration of 100 million people to urban areas over the next five years. While policies and actions by the authorities will on occasion be geared to support domestic interests at the expense of foreign interests, the authorities are clear that targeted foreign investment and opening up remain important components of long term economic success.

In sum, China’s ambitious reform goals are positive for the country’s development, but will undoubtedly continue to present challenges and bumps for those on the ground. The reforms are part of a continuing evolution that will require those operating in China to build an engagement model matched for the journey China is on over the coming years.

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Recent context

China’s leadership team has noted since the 18th Party Congress two years ago that the country faces a range of new and formidable challenges as it seeks to build a “moderately prosperous society” and realise the “Chinese Dream”. The Decision re-invokes a phrase used over the last two years that the leadership team is no longer “crossing the river by feeling the stones”, as the traditional proverb goes, but is instead in an area of deep water where the stones can no longer be felt.

Many of the objectives outlined in the Decision are positive steps forward for improving governance in China and aim to provide a framework to support the next phase of the country’s development and its continuing reform agenda. China watchers with a long memory, however, will note the promise of judicial reform at multiple points in the history of the People’s Republic, and the subsequent disappointments. While we remain cautiously

optimistic, the months ahead will give important signals whether the promise of judicial reform laid out during this Plenum genuinely ushers in a new legal framework.

Ultimately the judicial reform proposed does not fundamentally change the role or position of the Party. The decision clearly notes that the Party and the CPC leadership remain the fundamental guarantee of the rule of law. Legal reform aims to strengthen the legitimacy of the Party by overhauling the courts and instilling greater faith in a judiciary that has, as Xi Jinping noted, been “dogged by unfair trials and corrupt judges”. Xi also noted that “the judicial system is the last line of defence for social justice” and “if it fails, people will widely question (the country’s ability to realise) social justice, and stability will be hard to maintain”.

Key highlights from the Plenary include:

■ The Decision highlights confidence that judicial reform will not only benefit the Party’s position, but is critical to both its legitimacy and sustained growth.

■ The rule of law outlined in the judicial reform agenda differs from a Western view of separation of powers, and instead aims to improve the way the Party uses its power.

■ Judicial reform will enable the Party to continue to tackle vested interests and bad behaviours that undermine the future stable growth of the country.

■ Initiatives launched over the last two years by the Xi administration will continue, including the anti-corruption campaign. Both foreign and domestic companies operating in China must consider this the new norm and take it as a clear directive from the authorities regarding what is expected of companies and individuals.

■ Legal reform is a building block in a wider reform framework that began in 2008 when Xi Jinping and Premier Li Keqiang were members of the Politburo Standing Committee of the 17th Party Congress.

■ CPC Plenary sessions are designed to set overarching goals or “mission statements” that are then implemented at the government level. As a result there is a natural absence of the execution detail.

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Social rule of law with Chinese characteristics

Constitution at the Centre

The role of China’s Constitution received a significant boost from the Fourth Plenum, which positioned it at the centre of judicial reform. The Constitution is deemed the foundation of judicial reform and the Decision stresses that to govern successfully according to the law, it is first critical to govern according to the Constitution.

The Decision calls on all those within China to consider the Constitution a fundamental principal that must be upheld. In the future all officials elected or appointed by the National People’s Congress (including ministerial ranked officials, ambassadors, etc) will be required to openly swear allegiance to the Constitution—this is the first time officials have had to make any acknowledgement or commitment to the Constitution. The oath represents an acknowledgment by officials that they can be held to account for breaches.

By putting the Constitution at the centre, the leadership is giving tacit support to rights stipulated in the Constitution—including political rights, freedom of speech, and of association.

The Party above the Centre

Yet, if the Constitution is at the centre, the Party remains above it. The Decision is crystal clear that

the leadership of the Party remains paramount to the future of China. “The CPC leadership is the fundamental guarantee of the rule of law, and the Constitution is the fundamental law”, said Xi Jinping.

References to the Party typically precede mentions of the rule of law when they appear in the Decision, highlighting the critical role of the Party. The Decision aims to achieve alignment of the rule of law with the interests and vision of the Party—thereby removing future possible conflict. However, the Decision also calls on the Party to be held to a higher standard than State laws, that all levels of government must persist in conducting their work in line with the rule of law, and that any violation must be dealt with firmly.

The Party’s Legitimacy

By declaring the judicial system to be the “last line of defence of social justice”, and adding “that if it fails people will widely question the country’s ability to realise social justice, and stability will be hard to maintain”, Xi once again acknowledged that the citizen’s interests have a significant impact upon the decisions of the Party and that ultimately addressing societal interests are critical to shoring up the legitimacy of the Party.

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Supporting Previous Goals and Initiatives

Many of the statements in the Decision support initiatives and goals announced during previous plenary gatherings held over the last two years, including:

■ Market Forces: Enhancing laws to protect the commercial environment, such as contracts, property rights, and fair competition, is critical to ensuring that the market can play a decisive role in the allocation of resources and control the role of government even better.

■ Innovation: Enhancing intellectual property laws to support innovation and the commercialisation of innovation.

■ Corruption: Creating effective legal mechanisms so that no one “dares to be corrupt, can be corrupt, or wants to be corrupt”. At the same time, perfecting the criminal law system to punish corruption and bribery—and to broaden the scope of criminal bribery from assets to other forms of illegal enticement.

■ Environment: Implementing laws to protect the environment and substantially raise the cost of violating the law—including in relation to soil, water, air and maritime pollution.

The Judicial Reform Agenda

The Decision specifies a range of judicial reforms from the separation of judicial powers and responsibilities to policy turf battles, legal experience and awareness, and enforcement. We have drawn out

some of the more significant judicial reforms below.

Separation of Powers, Independence of the Courts

Judicial reform requires separating powers and responsibilities and also breaking conflicts of interest. Only with bold and firm actions can the authorities ensure the independence of the courts, eliminate local manipulation, and monitor and punish intervention in court cases by senior officials. Ultimately, the Decision notes that where there is power, there is responsibility and that where there are rights, there are obligations.

The Decision specifies that the reform plan include “guarantees of independence of courts and prosecutors” to break the chokehold that local vested interests have on courts in their jurisdiction—including incidents where local courts are influenced by local authorities to protect local businesses at the expense of the wider economy and environment.

To tackle this issue the Decision references multiple actions. Two important measures are designed to break the power of local interest

groups on the judicial process. The first is the establishment of a circuit court system by the Supreme Court to hear significant cases that cross administrative regions. The second is the establishment of People’s Courts and People’s Procuratorate’s that cross administrative districts (the Procuratorate is a legal supervisory system that is responsible for ensuring conformity of legality and to make sure that executive, judicial and local legislative bodies operate in accordance with national laws and regulations). Additional measures include establishing the regular rotation of personnel; creating a new promotion evaluation system for judges and prosecutors; removing the power of the courts to refuse to hear cases they don’t want to judge, and strengthening the role of people’s assessors (common citizens without a legal background selected to evaluate cases together with legally qualified judges), bringing the courts a step closer to an Anglo-American jury system.

In addition, the Decision calls for breaking the connection between the generation of income and the issuance of penalties, separating judicial administrative management of the Courts and the Procuratorate, and separating adjudication and enforcement powers.

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Accountability and Consequence

The Decision stipulates a range of measures to ensure accountability – from policymakers to legal professionals. Problems in administration and law enforcement such as failure to enforce the law or bending the law for personal gain will be strictly dealt with, Xi said.

The document calls for the establishment of a mechanism to ensure that policymakers are held accountable for their actions (or lack of action) for life. Where grave mistakes in policymaking are made or if there is a long-term delay in the making of policies that causes major damage, then those involved must be investigated and held accountable.

Those in the legal industry who violate the law will be prohibited from practicing in the future. Judicial personnel who are dismissed due to violations of the legal framework and lawyers who have had their licenses revoked will be prohibited from working in the industry for life. If the actions constitute a crime, then they will be prosecuted to the full extent of the law.

During a meeting of the National People’s Standing Committee held a few days after the close of the Fourth Plenum, the committee dismissed six lawmakers and accepted the resignation of three additional lawmakers. Those dismissed are facing allegations of bribery and violations of the law. A total of 27 lawmakers (mostly government officials) have been dismissed on corruption allegations since the 12th National People’s Congress began in March 2013.

These expulsions follow comments early in the administration that the Party leadership had changed an unwritten rule that current and former members of the Politburo Standing Committee were immune from prosecution. Zhou Yongkang, the former domestic security chief, is the first Politburo Standing Committee member to face investigation since reform and opening up began in the late 1970s.

Many had expected the Fourth Plenum to confirm Zhou’s expulsion from the Party, signalling an important step forward in his investigation and ultimate prosecution. The formal investigation into Zhou announced in July this year indicates that his expulsion is merely a matter of time. If Zhou faces trial, his punishment will send a clear signal from the leadership that the highest levels of the Party can be subject to the country’s laws, and that crimes can be prosecuted years after they are committed.

More senior officials are likely to fall under the investigator’s searchlight. In a speech, Wang Qishan, a member of the Politburo Standing Committee and head of the Central Commission for Discipline Investigation (CCDI), said that China’s war on corruption “will never end” and that the Party “cannot loose” reinforcing that those operating in China must consider this to be a new operating norm. He said the sweeping crackdown had also won widespread public support adding that “the CPC is a political organisation with a sacred mission” to build a stronger and more prosperous country.

Changing engrained behaviour requires resolve. Over the last two

years Wang Qishan has expanded the CCDI and been unrelenting in the pursuit of corruption at all levels within the Party. Investigators have also taken their search overseas with the launch of Operation Fox Hunt to bring those who’ve fled the country due to corruption home for prosecution. The message is clear: no one is immune from prosecution regardless of rank or location.

Criminal Cases

The authorities will also seek to enhance the management of criminal proceedings—including improving the system for the admittance of guilt and acceptance of punishment.

Defending Public Interests

Prosecutors may be allowed to institute public interest litigation to combat government abuse of power or nonfeasance—for example in cases of environmental pollution or public land disputes. This would enable the filing of litigation by those who were previously deemed as having no standing to sue the government. If this measure is adopted, prosecutors would serve as a new check and balance against government action, and it would require government representatives to appear in court.

Increasing Professionalism

The Plenary’s Decision calls for greater professionalism of the court system, including new rules for gathering evidence and witness testimony. Courts will have to allow greater public scrutiny of their judgements and should hire qualified

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lawyers as judges where possible. Currently, many judges have limited legal education so this reform will take some years to filter through the system.

However, the Decision does specify that new rules will monitor intervention in court cases by senior Party and government officials, record wrongdoing and hold them responsible. It notes that officials will be explicitly banned from asking judicial departments to breach their duty and judicial departments will be forbidden from following such orders. Those who breach these regulations will be held accountable.

Transparency, Building Trust

The Decision calls for moving forward with more open trials and the publication of legal rulings. Over the last two years the authorities have started to publish the transcripts of prominent high-profile cases in near real-time—including in relation to trials involving both Chinese and foreign nationals. This openness marks a move towards transparency and more open forms of communication in other areas of government.

Even the once secret Communist Party’s Central Discipline Commission has not only set up a website to disclose information, but also invited foreign journalists to visit its offices and is establishing a procedure to handle whistleblowers. While the level of transparency still falls far short of Western standards, China is demonstrating an intention to transition to a new era of more open government. As Xi has said, the public should have the ability to

scrutinise the use of power and “cage the power” of authorities.

Role of the Media

Over the last two years the authorities have launched new campaigns to tighten the traditional and social media environment. One campaign that has focused on the spread of rumour and the reporting of rumour as news has sparked criticism that it is a tool to restrict citizens’ rights and to control public opinion. The Decision adds to the restraint placed on the media environment with a requirement to standardise reporting of legal cases and prevent public opinion from influencing judicial fairness.

Achieving Judicial Change – Building Awareness

A critical challenge for the judicial reform agenda is the need to boost legal skills and expand public awareness.

To increase understanding and appreciation of the importance of rule of law across the country, the authorities will introduce rule of law education into the compulsory education system, with special content for primary and secondary schools. The authorities have marked 4th December as National Constitution Day and will launch a separate programme to educate citizens about the Constitution. The education drive mirrors a broader campaign to ensure that Party officials follow the law through study sessions, along with the time-honoured practice of criticism and self-criticism.

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Political backgrounder

The Communist Party of China

The Communist Party of China (“CPC”) was founded in 1921 and today has a membership of approximately 82.6 million citizens including government officials, military officers, state owned enterprise workers, private business people, farmers and students. Membership has grown from less than 40 million members at the 12th Party Congress in 1982 to 66 million ten-years ago when Hu Jintao and Wen Jiabao took the helm of the Party at the 16th Party

Congress. Over the last decade more than 17 million members were added.

Central Committee of the Communist Party of China

The Central Committee of the Communist Party of China (“CCCPC”) is responsible for managing the Party’s affairs for a five-year term. As of the 18th Party

Congress, the Central Committee is composed of 205 permanent members and 171 alternate members; 184 new members were introduced in to the 18th Party Congress. Permanent and alternate members were elected during the 18th Party Congress meeting that concluded on 14th November, 2012 by the delegates who attended the Party Congress. Appointees to the top Party and government positions, including the leaders of China’s provinces, are drawn from the members that make up the Central Committee. One of the key functions performed by the Central

Committee is electing the Politburo (currently 25 people) and in turn the Politburo’s Standing Committee (currently seven people).

Fourth Plenary Session of the 18th CPC Central Committee

The Central Committee (中国共产党中央委员会), considered the highest ranked organ within the

Party, holds plenary sessions that gather all members of the CCCPC and special guests to discuss and approve major policy decisions.

Fourth Plenary Session of the 18th CPC Central Committee

Date: 20th October to 23rd October, 2014

Participants: 199 Central Committee members and 164 Alternate Central Committee members

Politburo and the Standing Committee

The CCCPC is led by the 25-person Political Bureau or “Politburo” (中国共产党中央政治局) and the seven-person Standing Committee which sits at the top of the Politburo. The CCCPC is responsible for appointing the General Secretary, members of the Politburo, the Standing Committee, and members of the Central Military Commission.

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