Image of Photo of Prof Simon Deakin

The rule of law in China

The China Forum lecture on Thursday 9 March 2023 was delivered by Professor Simon F. Deakin (Professor of Law, Director of the Centre for Business Research, and co-Chair of the Strategic Research Initiative in Public Policy, University of Cambridge; Fellow, Peterhouse, Cambridge).

Professor Deakin argued that ‘law’ can be defined as a set of authoritative rules made, disseminated and enforced by a state that claims a monopoly of force within a given territory. Thus, law is bound up with the emergence of a particular type of nation state, which, in the Western case, occurred in the medieval and early modern period. The Rule of Law describes the situation where law has authority over a range of actors within a society or economy. The theory of natural law argues that law arises from ethical or moral considerations and emanates from some pre-existing order, be it social, economic or behavioural. ‘Positive law’ is where the law is perceived as relatively autonomous from other natural or social systems. The application of law became particularly important during the transition from the command economies in the 1990’s. Corporate law had been introduced but those who controlled assets and enterprises were able to use the legal vacuum caused by state suppression to capture value for themselves. Corruption arose because without a divide between private and public realms separating the market and state, neither can work properly.

In order to investigate the role of the legal system in China under reform and opening-up, Professor Deakin undertook field work in the coastal city of Wenzhou, where the 2006 Insolvency Law was used to resolve a financial crisis in 2011. Wenzhou had for many years relied on undocumented group financing based on personal relations and trust, often with no distinction between personal and corporate assets and obligations. The tangling up of many related parties resulted in contagion after a single large enterprise became insolvent. The Insolvency Law was used effectively to prioritise claims and enforce security, and local courts played a critical role. Many business owners had absconded or even committed suicide, so the court reassured key actors by emphasising through the local media the protective nature of the Insolvency Law. By working with local government, the courts devised innovative methods of asset disposal, such as online auctions and specially tailored local regulations. Since 2011, across China there has been an increasing use of law-based ‘formality’ in social disputes, labour law and arbitration, illustrating a trend towards ‘legality’ in China.

The Q&A session included the following; the role of religion in establishing norms that helped form the law in China; the extent that judges are willing to exercise judicial discretion; treatment or punishment of debtors with unresolved debts; the role of the law in reducing the stigma of insolvency; the methodologies used in qualitative fieldwork such as choice of interviewee; securing unrestricted access to interviewees; the lessons that might be gained from the experience of Hong Kong as a Chinese society exposed to Western legal norms over a much longer period; and the relevance of the experience of Hong Kong and Guangdong during the Asian Financial Crisis for understanding Chinese approaches to insolvency today.

Simon Deakin is a law professor at Cambridge, specialising in labour, private and corporate law, and director of the interdisciplinary Centre for Business Research within the Cambridge Judge Business School.  His books include The Law of the Labour Market (with Frank Wilkinson), Hedge Fund Activism in Japan: The Limits of Shareholder Primacy (with John Buchanan and Dominic Chai) and Is Law Computable? (with Chris Markou).  He is editor in chief of the Industrial Law Journal and an editor of the Cambridge Journal of Economics.