The New Validity Rules in Chinese Civil Code and Chinese State-owned Enterprises’ Freedom in Contracting: One Step Too Far

Abstract

Upon the enactment of Chinese Civil Code, the previous rules that allowed for enlarged state power to annul contracts such as General Principles of Civil Law article 58 §3 and Contract Law article 52 §1-§2 were dropped. Chinese law has gone one step further in promoting freedom of contract. The validity rules now have been streamlined and the previous contradictory and inconsistent treatment between civil juristic acts and contracts, state and private parties eliminated. However, the new legislative technique will unavoidably facilitate asset stripping, the very reason that the paternalistic rules were in place. Through a historical, doctrinal and logical lens, we will show why there can be no effective model of a neutral set of validity rules that could deal with state-owned enterprises in a less than free and competitive market. The only way to make it work is to have SOEs exit most of the competitive industries and focus on areas that serve the policy goals. Also, paternalistic rules concerning the validity of a contract in trading state-assets should be enacted either in the Civil Code or through special legislations and applicable to government, state-owned enterprises and private parties alike.