China's commitment to reforming industry laws is changing the climate for foreign investment, writes Clifford Coonan

WHEN BRIAN Cowen arrives in China at the head of a large trade delegation of Irish companies later this month, the focus of the trip will, as usual, be on China as a place to do business and on deepening ties with one of the fastest growing economies in the world, despite the global slowdown.

At a time when the global economy is reeling from poor oversight and when China's trading reputation has been blasted by a tainted milk scandal, the scores of Irish companies and legislators accompanying the Taoiseach on the trip will also be seeing what Ireland can learn from China in terms of making the country an easier place to do business in - how to avoid the pitfalls, such as major lapses of oversight as seen in the milk scandal, while maintaining flexibility.

Traditionally any conversation about China opens with a reeling off of the opportunities that exist in such a huge market, with its 1.3 billion potential buyers, cheap labour, strong pro-business government and the kind of political stability that you just don't get elsewhere in the region. Often as not these days, however, the discussion will turn to the regulatory environment and issues of oversight.

Opaque, non-transparent, unclear, murky, non-existent - different investors have different ways of saying the same thing to express their irritation with China's rules and regulations when it comes to investment.

Poor oversight means that 50,000 Chinese children were made ill and 13,000 hospitalised after they were fed infant milk formula tainted with melamine, a cheap industrial chemical that can be used to cheat quality checks.

The scandal has also caused major international dismay and is another black mark against the "Made in China" brand. In the past few years, products from toys to toothpaste, pharmaceuticals to pet food have been revealed as substandard and dangerous.

The issue highlights the long way that China has still to go on introducing the kind of legislation that gives international investors true peace of mind on regulation.

The powers-that-be, particularly in the reform-minded pro-business lobby, are keenly aware of this shortfall and one of the stated aims in recent years, has been to introduce the rule of law in all spheres of activity, not just business, as a way of making China more attractive to foreign investors, but also for domestic investors who want clarity on how they work and reasons to stay in the country with their investment ideas.

China has long made impressive noises when it comes to introducing the rule of law, but in the past couple of months there has been an acceleration in the pace of change.

Crisis in the global banking industry, and in Ireland, is often blamed on a lack of proper regulation. In China, they have been quick to write new rules to fit the changing environment in the country. The most significant milestones over the past two years include anti-trust legislation, which has major implications for mergers and acquisitions, and laws guaranteeing labour rights.

China is the EU's second largest trading partner and bilateral trade between the EU and China has been growing strongly. In a position paper, the EU has praised the raft of new regulations and laws, including the Anti-Monopoly Law and the Implementation Rules of the new Enterprise Income Tax Law. It has also had words of praise for the way China has improved consultation in the creation of certain legislation, such as the draft Food Safety Law and the draft Energy Law from December of last year.

Zhou Chunsheng, professor of finance at the Cheung Kong Graduate School of Business, who earned his PhD in economics from Princeton and has held professorships at many of China's top institutions, urges patience because many of the new laws are quite experimental.

"As a new emerging market, it is China's first time to introduce and implement many of these laws. I am sure that as the time passes, facts will tell whether our laws are suitable for China's national conditions."

The anti-trust rules have been described as the "constitution for China's market economy" for the way they seek to fight protectionism and to fight against those try to build up monopolies. It's been a long hard slog getting this rule introduced and not everyone is happy.

"It's taken 14 years to get this 'anti-monopoly' law introduced, but it is geared towards bigger interests. If you look carefully enough, you will find that the law has immunity provisions for certain industries. Those industries have state protection," wrote one anonymous commentator. Probably the most shocking of all, when you consider at least that this is a Marxist-Leninist country where the mandate comes from a dictatorship of the proletarian, is the bankruptcy law. Combined with legislation guaranteeing the rights of private property, this marks a sea change.

As Derek KY Lai, national leader of reorganisation services at Deloitte, says: "China is a Communist country. How can they have a bankruptcy law? Everything belongs to the people, the government. So if a bank goes bankrupt, the people go bankrupt, right? It took over 10 years to draft the bankruptcy law, which is essentially market driven. China is a planned economy so it's very different."

The bankruptcy law took effect last year after 14 years of haggling and horse-trading. One major difference in this law from the previous system is that it covers all types of enterprises, including private-owned firms, listed and non-listed companies and financial institutions.

Previously, only State-owned firms could declare bankruptcy. The fact that Chinese companies can now go under is a positive message.

However, headaches remain. It is feared that the law is difficult to enforce, because the judiciary is not experienced, for example.

The official bankruptcy statistics, which may be understated, show that over 67,000 small and mid-sized businesses shut their doors in the first half of this year, putting millions of people out of work, so the new legislation is politically difficult. It could also put the bankruptcy law into conflict with another new area of legislation, the labour law.

These new rules, for example, guarantee employees their unpaid wages before the claims of suppliers.

The law also entitles employees of at least 10 years' standing to sign labour contracts with no fixed termination dates, effectively guaranteeing the "iron rice bowl" principle which companies coming to China thought died out with the pre-reform era Communists, but seems to be back in strength.

The legislation was needed in the face of routine bad practice - employers often extended working hours beyond statutory limits and without paying overtime, payment of wages can be delayed, working conditions were unsafe.

In some cases, an employer would retain a worker's ID card to stop them leaving. Combined with mass layoffs from state-own firms, the ruling Communist Party needed to do something to ensure workers did not become restive and undermine its rule.

The rules have made labour more expensive but may ultimately prove helpful to Western manufacturers keen to show their Corporate Social Responsibility (CSR) credentials, a major factor for internationally listed companies - look at what happened to shares in companies like Apple when there were reports that one of its suppliers was making iPod components in sweatshop conditions.

Implementation will not be easy - around 200 million farmers in China have gone to work in building and manufacturing in the cities, many of them in unregulated areas.

Deloitte's Lai says a more sophisticated labour force and good implementation of the rules can help to offset the costs of the labour law.

At the same time, foreign corporates will be able to reap the benefits of China's solid infrastructure, something that regional rivals such as Vietnam still lacks.

Jiang sees the new legislation as part of an enormous reform project, and said that some teething troubles can be expected.

"The re-establishment of China's legal system has taken only 30 years, during which period China's society and economy have experienced many significant changes," said Jiang.

"The value of laws is that they solve problems that exist in reality, so to judge whether a law is good or bad depends on its ability to solve real world problems. Commercial laws are no exception," says Jiang.

What will decide the success of failure of the reforms will be how they are implemented, and how existing legislation is improved, and also what comes next on areas where China is seriously lagging internationally, such as in the development of a social welfare system.

Either way, as Lai says, "China will be a big country, and not just in terms of the number of people." Something the travelling Irish delegation does not need to be told.