Chinese reforms – Land and Intellectual Property

Revamp of the Chinese Property Rights (2016)

The Chinese government has been lambasted for over 20 years for its failure to protect land and intellectual property rights. The recently adopted set of guidelines (in December, 2016) paves way for a more robust economic scenario in terms of entrepreneurship, fosters positive expectations and boosts social confidence.

In a nutshell, the guidelines entails the following implications:

  1. Grant “equal status” and “equal protection” to state and private enterprises with regards to property rights.
  2. An amnesty program for private firms that have violated norms (eg. Carrying out tax evasion).
  3. Increase the magnitude and strengthen the system of intellectual property rights protection.

The objective of this article is to explain the importance of implication number 1 & 3 supplemented with an adequate amount of insight into the historical reasons which make these guidelines imperative.

# Problem of land readjustments in China

The agrarian sector in China could finally be motivated to invest back into their land. Image source: New York Times

With reference to point number 1, it is critical to acquaint ourselves with the problem of land readjustments (also commonly referred to as “land takings”). China is structurally an agrarian economy and in order to support crop produce, the Chinese government established the “Household Responsibility System” (HRS) in 1979. Farmers would be allocated a quota to produce and accordingly would sell the requisite amount to the government at a pre-determined rate. Whatever surplus was left, the farmer could sell it at the market rate at his/her own discretion. The problem in this system was that the security of the very tract of land that the farmer would cultivate on (and was highly dependent on for his source of livelihood) was uncertain. The feeble legislation system failed to ensure that farmers had official land contracts and that the farmer was guaranteed the land for a stipulated period of time. From a farmers stand point, the land could be taken away at any given moment. Surveys indicate that 43% of the land holdings in approximately 1800 villages have been taken away. Thus there is no incentive to increase the productivity of the land or channel investments into any agricultural activity.

Moreover, state enterprises enjoyed the status of the “foundation of a socialist market economy” deeming the status of a private enterprise to be inferior to that of a state enterprise. Thus private property could be expropriated (including situations where land was taken away from the farmers) and used for state purposes such as commercial development. There are several instances where farmers have been forced to part with their property at a below market rate and the same property was sold off by state parties at a 50% premium over the market rate. These Chinese reforms could change the market and the perception of the small value stakeholders.

Granting “equal status” and “equal protection”are going to be Chinese reforms to private enterprises will thus protect their ownership rights and create a situation more conducive for capital investment in the agricultural sector-the bedrock of the Chinese economy.

#Intellectual Property Leakages in China

Intellectual property leakage refers to a situation where one firm replicates the products/services that has been developed by another firm. This problem is widespread across China. The US government has claimed that China is responsible for 80% of the IP thefts from organizations headquartered in USA in 2013.

It is imperative herein to understand why this problem is particularly prevalent in China. Multinational firms see China as an ideal manufacturing/development owing to a relatively cheaper labour supply and an abundance of technological setups. Outsourcing from China thus props up the return on capital investment and allows a firm to price their products/services at a competitive rate. In the midst of outsourcing from China, the best practices of these firms and unique manufacturing processes get shared with local suppliers and thus begins the endeavor to replicate and sell at an even lower price.

The appalling reason behind the preponderance of intellectual property theft is the role of the Chinese government itself. It encourages “indigenous innovation” as “enhancing original innovation through co-innovation based on assimilation of imported technology”. The shocking objective here is to transform foreign technology into Chinese technology. Multinational firms in turn face a trade-off between lower cost of production and the risk of losing exclusivity of producing a product. US firms have lost over $200 billion on account of IP theft. This trade-off has led to a capital flight out of China given the reluctance of firms to set foot here.

To placate the multinational firms (the predominant drivers of foreign investment in China) and develop a sense of security, the Chinese government has taken the onus to give greater protection to foreign firms. The following norms have been established:

  • Monetary punishment for infringement of IP rights once the liability for such infringement has been ascertained.
  • Strengthening the mechanism of collecting information on the source of counterfeit products.
  • Consolidating three judicial procedures (civil, criminal and administrative) into one system to enhance the cooperation between administrative and criminal enforcement.

As the Chinese government seeks to rehabilitate the situation of property rights, it is hoped that foreign firms continue to have a vested interest in channeling investments and that private enterprises can flourish without the suppression of state-owned enterprises.

Ayush Banerjee

Ayush Banerjee

Policy Intern at InPRA
Ayush Banerjee has completed his bachelor's in economics from Narsee Monjee Institute of Management Studies. He has been associated with several NGO's (Round Table India, Make a Difference, Save the Children etc.) in the past and is committed to making a positive difference. An avid follower of activist investing and Buffetology, he aspires to become a successful value investor in the Indian equity markets.
Participating in debates and MUN's has motivated him to research on international law and change the public perception about the prevalent laws by conducting a deep dive analysis of policies and it's ramifications. He hopes to do the same by writing for InPRA.
Ayush Banerjee