Walter Hutchens’ Blog

The PRC Ministry of Education (MOE) has issued an Opinion that supplements existing regulations on Chinese-foreign educational ventures.

I’ve translated the Opinion here. It’s an Adobe PDF file, with the Chinese and English text side-by-side.

Comments on the translation are welcome. I tried to be faithful to the meaning and the spirit of the Chinese, but I didn’t try to render it word-for-word or “literally.” I’ll write separately about some translation issues I encountered.

The document is short but not a model of pithy legal drafting.

Much of the text is aspirational. There are exhortations for officials to strictly enforce existing rules. This seem redundant. It’s like a reminder, not a regulation.

Indeed, the Opinion is addressed to officials, not to the public (the people and institutions affected by the regulation). Chinese law in the dynastic era, I understand, was also addressed to officials, not “citizens.”

But it’s not only a reminder to officials to enforce existing rules. The Opinion also includes some new substantive matters.

It announces for instance that a special approval is required if an educational joint venture uses a “dual campus model.”

This is the first explicit notice that 1) a “dual campus model” is possible and 2) that a special approval is needed to use that approach.

However, the Opinion does not define a “dual campus” approach. The context suggests it means one foreign and one Chinese campus (as opposed to multiple PRC campuses), with students attending them sequentially. The animating concern of this section of the Opinion seems to be that in such dual campus arrangements it will be hard for the PRC party to “absorb” the curriculum of the foreign partner (and such absorption is explicitly part of what educational joint ventures are supposed to accomplish). Thus the Opinion says that teaching should mainly be done on the PRC partner’s campus (without defining “mainly”). When a dual campus approach is used (with approval), the PRC partner is reminded to be vigilant about absorbing the foreign curriculum.

Another substantive part of the Opinion is the creation of a list of factors to be considered by government agents when approving tuition rates (the notion that tuition is subject to approval is not new—that’s in existing rules).

I’ve been following China’s enactments in this area for a while. I’ve compiled a basic guide to the regulatory structure at chinaeducationlaw.com.

There’s a lot of educational “FDI” coming to China now. I’m currently working in one such venture. Overall, I think Chinese-foreign educational cooperation is a splendid thing. However, I sense a lot of institutions are coming to China, like waves of investors before them, enthralled with some kind of “China dream” that makes them drop their guard.

I suspect what often happens is that a foreign educator falls in love with China, becoming excited about the enormous potential here (a familiar story in other sectors, of course). Then, after a few rounds of friendly visits and talks, a deal is signed between the foreign intuition and a PRC university—without the foreign party ever having actually read (or being advised by somebody who has read) the relevant regulations.

If they did read the rules, it might give them pause. China’s rules governing this sector codify the government’s role in setting tuition, reviewing teaching materials and making sure the PRC party has mechanisms to control the venture. Probably no toasts are made to any of that at the banquets celebrating these deals.

The PR staff at the business school where I teach wrote a brief story for the school’s website about the travel course I led to Hong Kong in January. Teaching that class was great fun.

The forthcoming issue of the Chronicle of Higher Education includes an article about foreign institutions of higher education operating in China. Paul Mooney, the writer, is an experienced journalist and China hand. He talked to a lot of people (including me—I’m quoted a bit in the article) and gathered a lot of facts. It’s a very helpful introduction to the participation of foreign institutions in China’s higher education sector.

A couple of minor quibbles:

• As the article indicates, in China the University of Maryland charges only about half of the US tuition for an executive MBA. However, the article suggests that’s because in China we are using technology to dramatically reduce costs. Someone in our shop—not me—told the writer something that suggested this, but actuallyour EMBA programs in China are the same as the program in the U.S. (the professors and curriculum are virtually identical). Our China EMBA is not a distance education program. Not to cast aspersions on distance eduction—I just mean we aren’t dramatically economizing through technology. I think our PRC price reflects our (relatively high) costs, what we think the market can bear and what our competitors are charging.
• The article accurately quotes me opining that the PRC State Council rules on JV schools “flagrantly violate” something China promised to abide by when joining the WTO; however, they violate a specific WTO accession commitment on higher education, not some general GATT or WTO principle. The details are posted on my site chinaeducationlaw.net.

I’m working on an academic article about foreign educational institutions operating in China. Here’s the draft abstract:

Should Foreign Educational Institutions
Operate in China?
Analysis of the
Legal, Political and Competitive Landscape

This article is about foreign involvement in higher education in the People’s Republic of China (PRC or China). Many higher education institutions now see China as an important place for expansion. This study shows that although China presents an exciting opportunity, foreign institutions seeking to operate in China face myriad legal, political and competitive challenges. Before deciding to expand in China, institutions should thoroughly consider this daunting environment and, if they choose to proceed, take affirmative steps to protect their interests and values while operating in China.

I have pasted the Chronicle story after the jump.

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As a companion to the 15-year national science & technology development plan China released yesterday, a decision of the State Council has been released concerning implementation of the plans’ objective of developing China’s independent capacity for innovation. (law-lib.com distributed it today, though it is dated January 26).

In customary PRC fashion, it begins by invoking a string of set phrases (”in accordance with Deng Xiaoping theory and the important “three represents” thought, and in accordance with the spirit of the 15th Party Congress and the 3rd, 4th and 5th plenum sessions of the 16th Central Committee . . .”).

Its jest is to affirm the goal of developing an independent innovative capacity as a “basic line” for national policy in the years ahead.

There is nothing subtle about the nationalism underlying the policy. This State Council document proclaims developing China’s independent capacity for innovation is part of “the great revival of the Chinese race (中华民族的伟大复兴).”

I’ve put the full Chinese text of this State Council decision after the jump.

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China’s State Council today issued a plan for the development of science and technology in China through 2020.

In it China announces its intention to improve dramatically by 2020 its capacity for independent innovation (自主创新能力 zizhu chuangxin nengli). They declare an intention to become one of the world’s leaders of innovation—among the top 5 nations of the world in terms of scientific articles published and patents licensed—and decrease Chinese dependence on foreign technology. They plan to increase spending on R&D to 2.5% of GPD and “develop a group of technological achievements that have enormous influence.”

China certainly has the human talent to do all these things, and though there’s something a bit unnerving about China’s hyper-determined, nationalistic plan to become a S&T superpower, the planet could benefit from the unleashing of all that potential. But meeting China’s goals will require ongoing reforms.

Some of the needed reforms are in the legal sphere. For example, the US has no comprehensive national S&T plan but leads the world in innovation. Government funding for education and basic research (and tax breaks for R&D) all play a part in the US’s astounding success, but another critical factor is a supportive legal system. Venture capitalists and entrepreneurs can make enforceable contracts (rather than depending on guanxi or faith in some government actor), and they have the hope of getting rich through stock markets not controlled by government planners. Intellectual property rights are protected sufficiently (some argue too sufficiently) so that firms have incentives to invest in R&D.

PRC economist Wu Jinglian aruges, “Systems are More Important than Technology” [制度重于技术, Zhidu zhongyu jishu] To meet its science and technology goals, Chinese leaders need to heed that lesson.

PRC press reports on the plan are here and here.

The plan is titled Outline of the Long-term National Plan for the Development of Science and Technology (2006-2020) [国家中长期科学和技术发展规划纲要（２００６－２０２０年）Guojia zhong-changqi kexue he jishu fazhan guihua gangyao)]. The full Chinese text is available here.

Here Xinhua collects related speeches by Hu Jintao and Wen Jiabao and offers commentary on the plan’s highlights.

Xinhua reports:

China launches RMB interest rate swap transaction

www.chinaview.cn 2006-02-10 00:06:20

BEIJING, Feb. 9 (Xinhuanet) — China Development Bank and China Everbright Bank completed the country’s first RMB interest rate swap transaction here Thursday.

The interest rate swap transaction refers to periodic payments under agreement calculated, based on fixed and floating interest rates. It is an important indicator of the maturity of the financial market.

Experts believe that the service will reduce borrowers’ risk in the financial market, for example, with the housing loans.

Chinese banks long only provided floating mortgage rate. As the central bank raised the interest rate in October 2004, many consumers now have to pay more than they expected for the housing loans.

Based on the interest rate swap transaction, China Everbright Bank launched the country’s first fixed mortgage rates service for housing loan borrowers. The bank transfer the consumer’s risk to the capital market.

The Chicago Mercantile Exchange organized a conference on derivatives in Shanghai in September of last year.

China has cautiously begun to diversify its portfolio of financial instruments. Over recent years they’ve added mutual funds, exchange-traded funds, warrants and now are experimenting, at least among banks, with derivatives.

The disaster wrought by a China Aviation Oil employee who lost USD 500 million trading derivaties in Singapore (why is it always Singapore?) hasn’t been an inducement to rapid progress.

I’ve put the Chinese text of the PBOC’s regulations allowing experimentation with interest rate swaps after the jump.
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Reporter Li Jing at 第一财经日报 (Diyi Caijing Ribao, China Business News) writes that the CSRC is circulating a draft revision to its IPO regulations.

According to the article, the draft defines more strictly how companies can meet the requirements of three years of continuous profitability and minimum cash turnover that are mandatory IPO conditions in PRC corporate law. The draft requires that certain kinds of non-ordinary course of business revenues be excluded from these metrics.

In a liberalization, the draft also explicitly allows for IPOs to consist solely of the sale of existing shares (rather than being the issuance of new shares, which has been customary practice).

The proposed revision to the PRC’s IPO regulations also call for companies to publish their draft prospectus on the CSRC website before the firm is reviewed by the Public Offering Review Commission (PORC ;-)).

The PORC was created as an ostensibly independent body to review IPO applications. The original regulations creating PORC announced they aimed to “increase transparency,” but ironically they required that the identify of members of the PORC be kept secret (prompting me to write a paper in graduate school about “secret transparency” in PRC securities regulation). Presumably the idea was that if the members of PORC were unknown it would be harder to bribe them. However, given the windfall that results from an IPO, issuers had strong incentives to find out who would review their IPO applications. In due course a CSRC staff member was arrested for taking bribes to reveal such information. The CSRC reversed course, requiring that PORC membership be disclosed, that meetings be announced in advance, and that the individual PORC members reviewing particular IPO applications make a declaration that they’d not been subjected to any improper influence. This new idea of requiring an IPO candidates to publish its red herring before PORC meets to review its application is presumably another attempt to discipline PORC; if everybody knows what PORC is reviewing, they will presumably be under greater pressure to make listing recommendations in accordance with law.

The draft also reportedly eliminates the 1-year coaching period IPO candidates are now required to undergo.

The PRC Company Law and PRC Securities Law were amended recently. The new versions came into force January 1. The draft regulation also reportedly addresses the problem of firms approved for an IPO under the old laws but which did not list before the new laws became effective. Such firms must meet the requirements of the new laws but do not have to go through the PORC review process again.

The article ends with a bland quote from some anonymous securities firm executive stating that the new rules will overall be good for the market, “especially for small investors.” Perhaps so, but wouldn’t it be nice if the CSRC publicly disclosed the draft regulations now so that small investors and not just the CEOs of securities companies could comment on them?

Comments on China Business News from other China-focused bloggers are here at Danwei.org and here at Bingfeng Teahouse.

The China Economic Review reports (or, more precisely, relays the report) that:

Bank of China, the mainland’s second-largest lender, will delay its US$8 billion to US$10 billion planned IPO until as late as June after pressure from Beijing to offer shares in both the mainland and Hong Kong, the Standard of Hong Kong reported, citing sources familiar with the deal. Though the bank succeeded in heading off a simultaneous dual listing by promising to sell A-shares in Shanghai some time in the future, the intervention has thrown the listing off schedule. The H-share sale, expected to be one of the largest this year, was scheduled for the first quarter.

I wonder if pressure about an A-share listing is really the sole cause of the delay. Could the recent arrest of some Bank of China officials in Las Vegas be a factor? Big as the Bank of China is, theft of USD 500 million (the amount of plunder reported) seems “material.” Or perhaps other factors are at work. But pressure, apparently overcome, for a simultaneous A-share IPO doesn’t strike me as an adequate explanation.

It is noteworthy that BOC will apparently list only in Hong Kong. This follows the lead of China Construction Bank which raised about USD 9 billion in a HKEx-only IPO last year. While PRC banks may not be the gold standard in terms of financial metrics or transparency, if jumbo IPOs continue to bypass the U.S. the backlash against Sarbanes-Oxley will gather strength.

The South China Morning Post has published a profile of He Weifang, Beijing University professor and passionate advocate of PRC legal reform. Professor He is one of China’s leading public intellectuals. I was honored to meet him last year at a conference on Chinese law at Columbia.

New York Times Jan 2006 Top Ten Search Terms

The venerable New York Times, which has for years had some of the finest China reporting, now sends out an email with links to its most popular stories for a given month (most popular in terms of how frequently they’ve been emailed through the Times’ forwarding system).

In the margin of that email for January I found this list of the most popular search terms for the month. China is number two, right after India but ahead of Brokeback Mountain, a film about gay cowboys (however, that film’s director is Ang Lee, whom Xinhua proudly points out is a Chinese director, so maybe there’s some overlap there).

I had to look up who Larry David is.

This is a stock certificate from the Shanghai Feile Stereo Company, dated December 1984, issued “with the approval of the Shanghai PBOC.” Feile is usually cited as the first, or at least one of the first, PRC companies to publicly issue shares.

I wonder what would have happened to China’s stock markets if experimentation with decentralized share-issuing–of the kind represented by Feile–had not been “rectified” and “standardized” by the central government’s take-over of the IPO process. I doubt the PRC’s stock markets would be worse off than they are now.

From today’s Washington Post:

In October, You also introduced a new system for determining bonuses for the company’s more than 15,000 consultants. In the past, the bonuses of BearingPoint consultants were based largely on the number of hours they billed to customers, You said. That program backfired in a very public way last week when the company disclosed that some employees in its Chinese subsidiary falsely inflated their time sheets to increase the size of their bonuses. [Link]

I have some good friends at BearingPoint in China (which is of course a huge operation), and I’d still highly recommend the firm. I doubt, really, there’s any jurisdiction in the world where this isn’t a problem whenever compensation is tied to billable hours. Using billable hours is just a bad system. It creates incentives for inefficiency, besides the moral hazard of tempting people to over-bill.

All that aside, the list of US companies who’ve had quite public problems with China staff in recent years now includes, at least, Lucent, Citigroup, Apple, BearingPoint . . .

Today the Shanghai Stock Exchange released detailed new rules on the trading of bonds. I’ve pasted the full text (in Chinese) after the jump. These rules come into effect on May 8.

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After being closed for a week for the Chinese New Year break, China’s stock markets have moved up a bit over the last few days.

(This brief PRC press story) speculate that a recent State Council Notice contributed to today’s uptick in the markets.

The State Council’s General Office issued a Notice on Work Related to the Thorough Implementation of the Revised Company Law and Securities Law [国务院办公厅关于做好贯彻实施修订后的公司法和证券法有关工作的通知 Guowuyuan bangongting guanyu guanche shishi xiudinghou gongsi fa he zhengquan fa you guan gongzuo de tongzhi] back on December 23. The Chinese text is available here.

A report about the Notice appeared in today’s China Securities Journal.

The Notice reiterates that stock exchanges cannot be established without State Council approval and that trades may not take place off approved exchanges without special State Council approval. It also reiterated that traders must observe China’s limitation on margin trading.

Just as blogs have created a new stream of media (disinter-mediating publishing, so that anybody with the impulse to publish can do so using a computer and Internet connection), podcasts are adding audio (and sometimes video) content to the new media mix.

The Legal Talk Network is a nice site focusing on (mostly US) legal matters. One of its creators, Robert Ambrogi, has a helpful overview of law-related podcasts here.

For the students participating in my May doing business in China class, I’ve pointed them to ChinesePod.com for downloadable lessons.

Chinese-language podcasting is also flourishing. One sampling is available here.

Warburg Pincus has agreed to a strategic investment in Hong Kong-listed PRC electronics retailer Gome (国美 Guo Mei, which is a much better-sounding name in Chinese, implying “beautiful country,” whereas the English name evokes “gnome” or “gone”) .

The Economist recently published a profile of Gome’s founder Wong Kwong-yu, one of China’s richest individuals according to Forbes.

There are a number of PRC big-box electronics stores. China Paradise (永乐, Yongle), like Gome, is also listed in Hong Kong (it’s 2004 IPO prospectus is here). Another substantial player is Suning (苏宁), listed on the Shenzhen exchange.

However, as the Economist notes, retail electronics sales are “highly fragmented” in the PRC. This exemplifies the remarkably resilient Chinese pattern of “petty capitalism” (to use Hill Gates’ term). In both Hong Kong and the PRC mainland many people buy electronics through tiny stalls in computer markets like Buy Now (百脑汇 Bai Nao Hui).

According to FinanceAsia Warburg’s stake in Gome will cost $128 million for a bit under 10% of the company. It is structured through the issuance of convertible bonds and warrants and involves assorted promises from Wong about potential conflicts of interests between the listed arm of Gome and some of his other personal holdings.

Warburg owns Neiman Marcus. I wonder if that helped persuade Wong they’d be a good partner.