In its struggle to enforce environmental regulations and consolidate underperforming enterprises, China's central government is turning to a historically marginalized branch of the state: the court system. Several recent developments illustrate Beijing's growing desire to restore courts' influence in the country to supplement its preferred regulatory enforcement tools, such as inspection teams and local environmental protection bureaus. But considering the history of China's legal and regulatory systems — and the country's political power structure — empowering the courts will be easier said than done.
Intersecting Goals
Shortly after taking office in 2012, President Xi Jinping made the strengthening of China's legal institutions, which had moldered for some years following a surge of litigation in the 1990s and early 2000s, one of his administration's main objectives. But despite repeated pronouncements on the importance of the rule of law and efforts to implant law at the heart of major economic and social reforms, the initiatives have had only mixed success. In part, this reflects the enduring questions over what "rule of law" means in China — namely, how to build effective legal institutions in a system in which the Communist Party and its leaders stand above the law, in principle and often in practice. It also reflects the Chinese government's continued reliance on non-legal means — for instance, purging political opponents from the party ranks — to achieve core policy goals. (China's legal system has played a negligible role, for example, in Xi's anti-corruption campaign.)
Now, China's courts are regaining their prominence. In July, a court in Shandong province ordered a local glassmaker to pay $3.3 million in indemnities and issue a formal apology to its locality for pollution. The finding marked the first successful lawsuit of its kind in China since the government enacted a new law in early 2015 that, among other things, empowers local prosecutors and non-state groups to bring legal action against corporate polluters. The next month, China's highest judicial body called for the formation of specialized tribunals, initially in 11 provinces and the four centrally administered municipalities, to handle corporate bankruptcy and liquidation cases. By the end of the year, the courts will be up and running throughout China with the intent to accelerate the consolidation of foundering "zombie" companies by providing each region with a dedicated platform for resolving corporate bankruptcies. The courts will also guide inferior courts and local governments on how to manage liquidations and bankruptcies.
Though ostensibly unconnected, the court system's shifting roles in environmental protection and industrial consolidation efforts are intertwined. Beyond the fact that both processes represent a push to boost the courts' authority relative to that of their peer agencies and governments, they are also mutually conducive. As China's leaders have frequently acknowledged, industrial consolidation is key to combating pollution, and combating pollution, in turn, is key to industrial consolidation. Many of China's biggest polluters, such as the coal and steel industries, are also host to a disproportionate share of its zombie companies. The more effective Chinese courts are at enforcing environmental regulations, the more successful the government will be at ensuring that struggling businesses actually fail — not least of all because stricter environmental protections will likely drive up operating costs. Likewise, the better the new tribunals are at liquidating or consolidating these businesses, the faster air and water quality will improve in China's most polluted regions.
An Ambitious Undertaking
Even so, it is too early to tell whether the recent calls to increase the courts' role in key initiatives such as industrial consolidation and environmental protection will change their political standing in the long run. To a great extent, the success of the bankruptcy tribunals will depend on resources: how well-funded and well-staffed they are, and how committed Beijing is to grooming lawyers and jurists with expertise in bankruptcy and restructuring proceedings. On top of that, the courts' degree of independence from local governments, local jurists' incentive structures and the development of strong enforcement mechanisms for legal decisions will determine their efficacy.
[sidebar title=" Why are China's courts historically weak?" imgurl=" https://www.stratfor.com/sites/default/files/styles/stratfor_full/public/main/images/China%20Flag%20for%20Sidebar%20587157182.jpg?itok=jlcJyBEr"] The weakness of China's court system owes to both institutional and political constraints. A robust court system is expensive and requires institutional infrastructure that until recently China, a developing country, has lacked. At the same time, law's ambiguous role in the People's Republic — technically, the Communist Party stands above the law — has undermined efforts to build a better legal system. [/sidebar]
But the true test of whether litigation will be a successful tool for environmental enforcement will be Beijing's willingness to allow organizations not affiliated with the state to bring cases against polluting businesses. So far this year, most environmental lawsuits have been filed by state-affiliated groups such as the All-China Environment Federation, which spearheaded the Shandong case and is tied to the Ministry of Environmental Protection.
Broadening Legal Horizons
Another factor to consider when gauging the courts' future success in regulatory enforcement is that, until recently, this simply was not part of their mandate. Compared with countries such as the United States and the United Kingdom, which have had robust regulatory institutions for at least a century, China has come to regulation only recently, a product of two decades of rapid socio-economic change and institutional development. Until 2007, the country lacked a bankruptcy law governing private enterprises. Only in 1998 did China create a ministry-level agency for the environment, the current version of which came into existence 10 years later.
Although China's legal system has a longer history, it was of minor importance throughout the Mao Zedong and early Deng Xiaoping eras. In the years surrounding China's accession to the World Trade Organization in late 2001, the country's legal system took off as Beijing turned to litigation to handle the growing number of labor disputes. Even during this time, however, courts maintained a narrow purview; resolving labor disputes remained their primary function. Throughout the mid-2000s, civil courts played little to no role in other policy spheres.
After 2006, the courts' role shifted again as litigation came under fire. Over the past decade, China has gradually transitioned to informal mediation and conflict resolution to settle labor disputes. The turn away from legal proceedings was, in part, an effort to reduce costs and alleviate the institutional burden that rampant litigation had put on China's notoriously underfunded and understaffed courts. At the same time, it addressed Beijing's concern that resolving workplace disputes in the public forum of civil courts could prove socially and politically destabilizing. But whatever Beijing's underlying motives, the trend continued throughout the final years of Hu Jintao's administration and into Xi's, undermining the prominence that courts had gained in the litigation boom.
Against this backdrop, broadening civil courts' focus to corporate bankruptcy and environmental protection signals a shift, at least on paper, in the role of the legal system in China's political economy. Furthermore, it represents a concrete step toward realizing Xi's calls for stronger rule of law. But as is often the case in China, the gap between policy and practice could prove vast. When it comes to China's court system, narrowing that gap will require a substantial and sustained commitment on Beijing's part to empower courts in ways that it never has.
