Private sector: What the new law changes – and what it leaves untouched

What can you tell us about the Private Sector Promotion Law (民营经济促进法), which will come into force on May 20?

Sebastian Windieck: The law aims to strengthen the private sector and further eliminate the discrimination that still exists compared to state-owned companies. This has been a demand of the Chinese private sector and foreign chambers of commerce. Private companies generate over half of China's gross domestic product and employ a large proportion of the workforce.

What disadvantages do private companies face in specific cases?

Payment behavior is also an aspect of finance…

Koppitz: This weighs on private companies. The law is intended to improve this. For example, a new regulation will come into force in June, stipulating that payments to small and medium-sized enterprises must be made within 30 or 60 days. This is supposed to strengthen SMEs.

Are there any advantages that the law will bring to foreign companies?

Can companies seek legal remedies if they are still not treated equally?

Local governments and relevant authorities will also be required to report regularly on cases of discrimination. The law also establishes a right to compensation if a company has indeed been discriminated against. It is very positive that there are these legal protection options and that civil servants in public authorities who discriminate against companies can be held personally liable. I believe this is a very sharp sword that can certainly be used to exert pressure. But the question is, of course, how this is implemented in practice.

In addition – and I think this will be the biggest challenge – the burden of proof for discrimination lies with the company affected. It must document that it has been discriminated against and that another company has been given preferential treatment.

Are companies likely to use the complaints procedure and succeed?

Now it is normality and there is no hesitation at all to question the decision of the trademark office, for example, and to appeal accordingly.

How likely is it that the law will be successfully implemented and have an impact?

Ralph Vigo Koppitz and Sebastian Windieck are lawyers and partners at Rödl Partner in Shanghai. The law firm has been supporting German and international companies in various industries with their business activities in China for 30 years.

Ralph Koppitz : In recent years, Xi Jinping has greatly emphasized strengthening state-owned enterprises. This has led to a certain level of uncertainty among Chinese private companies. Specific countermeasures are now being taken, which can be seen as an essential step. The interesting questions will now be the implementation – both from a Chinese and a foreign-invested perspective.

Wiendieck : For example, tenders sometimes require licenses that are not necessarily relevant to the project, but that only state-owned companies can produce. Also, it may happen that only domestically invested companies are allowed to participate in a tender, but not foreign-invested companies. On the one side, the aim is to prohibit discrimination against private companies compared to state-owned companies, and on the other, to ensure that all private companies in China are treated equally.Does the timing of the law have anything to do with the tense economic situation?

Koppitz : Yes, my impression is that China wants to improve the mood, and that includes improving the sentiment in the private sector, whatever the cost. The law is a piece of the puzzle that is now coming in the first half of the year and which the government hopes will have a positive impact over the rest of the year.Wiendieck: The party and government have recognized that they must strengthen the private sector. However, the Chinese economy is not necessarily demand-driven. That makes it always difficult to predict how the economy can be stimulated. The law is a step towards achieving this goal: By strengthening private companies over state-owned companies, which also have significantly different financial resources and are being nurtured and kept alive by local governments. To strengthen private companies, the law also provides for easier access to loans and financing options.

Koppitz : Regarding financing, another aspect is regulated, which is equal treatment regarding special taxes or fees. Here, too, lie many indirect subsidies where state-owned companies are treated differently from private companies. In addition, licensing procedures and the like are to be simplified. Of course, cutting red tape would generally be a good thing. China has repeatedly made progress in this area in recent years, but it is also a traditionally bureaucratic country, and if there are simplifications in this area, it would certainly be very beneficial for companies.

Wiendieck : If you offer a needed niche product, you are generally not exposed to the insane price competition from market competitors and usually receive your money relatively quickly. However, if you are in the commodity sector, you are interchangeable, and then six or even twelve months is nothing when it comes to payment terms. In the market, you sometimes hear that payment is only made after a year or even a year and a half.

Wiendieck : The law does not explicitly state that foreign companies are treated equally to Chinese companies. However, foreign-invested companies in China are also considered Chinese companies. Therefore, no explicit regulations are required here. The law stipulates that private companies – whether Chinese-invested or not – should be treated equally. Foreign-invested companies can also benefit from the fact that the law particularly emphasizes the protection of intellectual property. This is another boost that benefits international companies, which might sometimes be afraid to participate in a tender because they don't know what will happen to all the information they disclose.

Koppitz : The equal treatment of private companies compared to state-owned companies is a very important fundamental principle that has been repeatedly called for by foreign companies and is now being regulated. However, this also makes it easier for China to say: 'Look, we have now enshrined this in law, please don't complain.' The interesting question will therefore be implementation. It may happen faster in big cities like Shanghai, Beijing or Guangzhou. Somewhere in the provinces, it may be more difficult.

Wiendieck : Yes, to this end, the law decisively strengthens the legal position of private companies. By explicitly enshrining conciliation, arbitration and litigation proceedings as permissible ways of resolving disputes, the law sends a clear signal: private companies have the right to insist on fair and efficient dispute resolution. This legal recognition increases the pressure on authorities and courts to process complaints transparently and with priority.

Koppitz : There is a certain reluctance in China, perhaps also for cultural reasons. In Germany, if you don't receive a building permit, for example, it's common practice to file an appeal and, if necessary, go to the administrative court. This is not currently the case in China. The new law aims to facilitate these options, but it is a long process and will not succeed overnight, as we have seen in the area of industrial property rights. When China joined the WTO, and it suddenly became possible to review decisions of IP authorities under the new laws, it took a while for companies to implement this.

Koppitz : As always in China, implementation is a significant challenge. It depends on the political will, and at the moment, you really get the impression that the central authorities want to address these issues. So I would expect that if this political will comes from the top, you will also find suitably qualified officials who are able to implement it. And this could result in tangible improvements that could also benefit foreign-invested companies.