Law, Trust and Institutional Change in China: Evidence from Qualitative Fieldwork

What has been the contribution of the legal system in general, and of contract, corporate and financial law in particular, to economic growth and development in China? The Chinese experience of rapid growth in recent decades appears to contradict the claim that ‘law matters’ for economic development. It can be argued that China incompletely recognises the security of contract and property rights which new institutional economics identifies as having been essential to the rise of market economies in the global north. Official discourse in China identifies a version of the rule of law ‘with Chinese characteristics’, which is explicitly distinct from the prevailing notion of the rule of law in the west. For many commentators, it is therefore precisely the absence of western notions of legality in China which is responsible for driving Chinese growth, by enabling business and government alike to act with a degree of flexibility which is not found in more developed industrial economies.

Yet, claims for Chinese exceptionalism too often rely on broad-brush references to ‘culture’ and ‘values’ which remain elusive to systematic analysis. There is therefore a danger of embedding a narrative of China’s development beyond the rule of law which, as some commentators (if a minority) have recognised, fails to capture the changes which have occurred in legal institutions and in attitudes to the legal system contemporaneously with the rise of a market economy since the 1980s.

In a new article, we explore the role of contract, corporate and financial law in China, being part of a wider ESRC-funded project on Law, Finance and Development in Rising Powers. Our work draws on interviews and focus groups with entrepreneurs, managers, lawyers and bankers in Beijing and the Pearl River Delta, carried out between November 2013 and December 2015.

Overall, we do not find evidence to support the claim that China’s growth, now or in the recent past, has depended on the absence of law and on the presence, instead, of inter-personal trust or guanxi. While this may have been the case at the start of the period of market-based reforms several decades ago, our interviews suggest that legal and business actors increasingly see costs attached to the use of guanxi as the basis of contractual relations in China. By contrast, with respect to financial markets, the situation is considerably different from that in developed economies. In Europe and North America, financial markets largely evolved spontaneously or on the basis of private action and self-regulation. In China, however, the state has led their development. In the case of the capital markets, there is much less room to contract around inefficient formal rules than in product markets. Market actors perceive that a shift may be taking place towards more transparent and impersonal exchange in financial markets, but recognise that financial transactions lag behind the product markets in this respect.

We also see complex attitudes to the issue of the role of the state in China’s future economic and institutional development. There is no single view: some of our interviewees see the Chinese state as a distinct model, unlike its Western counterparts, which by virtue of its particular capacities is in a position to underpin continuing economic development, as it has done since the start of the reform era. The state’s role in coordinating expectations, in particular by maintaining confidence in the economy while providing institutional continuity, was highlighted in several interviews. At the same time there was a view that economic development was being held back by the absence of a Western-style rule of law, and that China’s future depended on the ability of the state to manage this transition.

While it remains to be seen how this process will unfold, we see evidence to confirm the suggestion that the Chinese version of the rule of law will in future involve less reliance on guanxi, and a greater emphasis on judicial independence and objectivity. We also think that our findings are broadly consistent with the view that the emergence of the rule of law as a self-sustaining social norm is both a cause and effect of market-led economic growth.

Ding Chen is a Senior Lecturer in Corporate and Commercial Law at the University of Sheffield, Simon Deakin is Director of the Centre for Business Research and Professor of Law in the Faculty of Law at Cambridge, Mathias Siems is a Professor of Commercial Law at Durham University, and Boya Wang is a Research Fellow at the Centre for Business Research of the University of Cambridge.