```

[Joint House and Senate Hearing, 108 Congress]
[From the U.S. Government Publishing Office]

 
  OWNERSHIP WITH CHINESE CHARACTERISTICS: PRIVATE PROPERTY RIGHTS AND 
             LAND REFORM IN THE PEOPLE'S REPUBLIC OF CHINA
=======================================================================

                               ROUNDTABLE

                               before the

              CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                            FEBRUARY 3, 2003

                               __________

 Printed for the use of the Congressional-Executive Commission on China

         Available via the World Wide Web: http://www.cecc.gov

                                 _________

                       U. S. GOVERNMENT PRINTING OFFICE
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____________________________________________________________________________
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              CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA

                    LEGISLATIVE BRANCH COMMISSIONERS

House

                                     Senate

JIM LEACH, Iowa, Chairman
DOUG BEREUTER, Nebraska
DAVID DREIER, California
FRANK WOLF, Virginia
JOE PITTS, Pennsylvania
SANDER LEVIN, Michigan*
MARCY KAPTUR, Ohio*
SHERROD BROWN, Ohio*
JIM DAVIS, Florida*

                                     CHUCK HAGEL, Nebraska, Co-Chairman
                                     CRAIG THOMAS, Wyoming
                                     SAM BROWNBACK, Kansas
                                     PAT ROBERTS, Kansas
                                     GORDON SMITH, Oregon
                                     MAX BAUCUS, Montana
                                     CARL LEVIN, Michigan
                                     DIANNE FEINSTEIN, California
                                     BYRON DORGAN, North Dakota

                     EXECUTIVE BRANCH COMMISSIONERS

                 PAULA DOBRIANSKY, Department of State*
                 GRANT ALDONAS, Department of Commerce*
                D. CAMERON FINDLAY, Department of Labor*
                   LORNE CRANER, Department of State*
                   JAMES KELLY, Department of State*

                      John Foarde, Staff Director
                  David Dorman, Deputy Staff Director

* Appointed in the 107th Congress; not yet formally appointed in 
  the 108th Congress.

                                  (ii)

                            C O N T E N T S

                              ----------                              
                                                                   Page

                               STATEMENTS

Randolph, Patrick A., professor of law, University of Missouri at 
  Kansas City, Kansas City, MO...................................     2
Schwarzwalder, Brian, staff attorney, Rural Development 
  Institute, Seattle, WA.........................................     6
Dorn, James A., vice president for academic affairs, the Cato 
  Institute and editor, the Cato Journal, Washington, DC.........     9
Cohen, Mark A., attorney-advisor, U.S. Patent and Trademark 
  Office, Washington, DC.........................................    13

                                APPENDIX
                          Prepared Statements

Randolph, Patrick A..............................................    28
Schwarzwalder, Brian.............................................    33
Dorn, James A....................................................    37
Cohen Mark A.....................................................    40

  OWNERSHIP WITH CHINESE CHARACTERISTICS: PRIVATE PROPERTY RIGHTS AND 
          LAND REFORM IN THE PEOPLE'S REPUBLIC OF CHINA [PRC]

                              ----------                              

                        MONDAY, FEBRUARY 3, 2003

                            Congressional-Executive
                                       Commission on China,
                                                    Washington, DC.
    The roundtable was convened, pursuant to notice, at 3 p.m., 
in room 2168, Rayburn House Office Building, John Foarde [staff 
director] presiding.
    Also present: Jennifer Goedke, office of Representative 
Marcy Kaptur; Susan Weld, general counsel; Andrea Worden, 
senior counsel; Keith Hand, senior counsel; Selene Ko, chief 
counsel for trade and commercial law; Steve Marshall, senior 
advisor; Chris Billing, communication director; Anne Tsai, 
specialist on ethnic minorities; Lary Brown, specialist on 
labor issues; and William Farris, senior specialist on Internet 
issues and commercial rule of law.
    Mr. Foarde. Welcome to the second of the staff-led public 
issues roundtables for the calendar year 2003 of the 
Congressional-Executive Commission on China.
    My name is John Foarde. I am staff director of the 
Commission. With me we have colleagues from both the Commission 
staff and the personal staffers to our Commission members, 
seated mostly at the other end of the table. I will be 
introducing you to them a bit later in the program.
    The topic of our conversation today is ``Ownership with 
Chinese Characteristics: Private Property Rights and Land 
Reform in the PRC.'' Our session today is scheduled until 4:30 
p.m., but we may extend the discussion a bit.
    Professor Randolph will be our first speaker, as he is 
going to have to leave about 4:30 to make his flight back to 
Kansas City. So, we will bid him adieu when that time comes, 
but in the meantime we will look forward to hearing from him 
and benefiting from his expertise.
    Copies of the prepared witness statements are at the back 
of the room on the distribution table, and they will be 
available on the Commission's Web site. That is www.cecc.gov.
    As usual with our issues roundtables, a full transcript of 
the roundtable will be available on the Web site in between 4 
and 5 weeks. It takes us a few days to get the transcript back 
and to circulate it to our panelists and to our colleagues and 
the staff so that they can make grammatical corrections and we 
can clean up the record. That is why it takes a bit longer than 
we would like.
    We have four distinguished panelists with a wide range of 
experience in law in China. They are Patrick Randolph, 
professor of law at the University of Missouri at Kansas City 
[UMKC]; Brian Schwarzwalder, staff attorney for the Rural 
Development Institute [RDI] in Seattle, WA; James Dorn, vice 
president for academic affairs at The Cato Institute and editor 
of The Cato Journal, from here in Washington, DC; and Mark 
Cohen, an attorney-advisor with the U.S. Patent and Trademark 
Office. I will tell you a little bit more about each before 
they speak.
    Each speaker will have 10 minutes to give us a 
presentation. And we hope we can pick up the themes in their 
presentations in the question and answer session later.
    So, without further ado, let us begin with Patrick 
Randolph. Pat is a professor of law at UMKC. He is an expert in 
property law and has a long experience working in China. He is 
co-author of a book entitled ``Chinese Real Estate Law'' and he 
was recently named codirector of the Peking University Center 
on Land Law and Policy.
    Pat, please go ahead.

STATEMENT OF PATRICK A. RANDOLPH, PROFESSOR OF LAW, UNIVERSITY 
          OF MISSOURI AT KANSAS CITY, KANSAS CITY, MO

    Mr. Randolph. Thank you for having me here today. I am, 
essentially, a dirt lawyer, an American dirt lawyer. I have 
spent most of my life doing real estate law and commenting on 
being an 
American.
    About 10 years ago, I got interested in Chinese real estate 
law during a visit there, and since then have spent quite a lot 
of time watching Chinese real estate law develop as best it 
could on the heels of, rather than in advance of, all of the 
real estate development that is happening in China. Chinese 
real estate law is doing a job of catch up. I find it 
fascinating to watch, and I hope in my heart that the law will 
eventually catch up and lead real estate development in China. 
I think that there is optimism about that. I am happy to talk 
to you about some of those issues today.
    I think one of my functions is to give you something of an 
overview of the basis of China's real estate law. Essentially, 
until 1988, this was real estate law in China: the state owns 
everything, and you can stop there.
    In 1988, the Constitution was amended to create the concept 
of the transferable interest in property that could be 
privately owned and transferred. This interest was called the 
Granted Land Use Right.
    As I said, it has existed since 1988. And some laws were 
developed even prior to that time that referred to it, and 
certainly after that time, but because of other political 
problems in China, the economy slowed down and development 
slowed down for a while. It was not really until the early 
1990s that we saw real estate development take off and with it, 
the need for greater development of the regulatory system for 
real estate.
    The basic building block of the Chinese system that granted 
land use rights is a term of years in American terms. The term 
lasts from between 40 to 70 years, depending upon the right. 
You buy it up front. So, it really is not like a lease when you 
pay rental payments periodically. You get it up front.
    Perhaps the most significant difference between the Chinese 

concept and the American concept is that the Chinese are very 
powered on speculation in many areas, including this one. 
Consequently, when you apply for a land use right, you have an 
identified purpose to which you are expected to put it, and you 
must put it to that purpose within a short period of time--I 
believe the time is 3 years--or else you forfeit the right and 
anything you paid for it.
    So, it is a rather draconian penalty for failure to develop 
the property. This requirement is met with various 
arrangements, but I think that it is a reasonably severe 
consequence and certainly drives a lot of Chinese real estate 
investment.
    As I suggested, a transferable real estate right is not 
only transferable, but also mortgageable and inheritable. You 
can lease 
property that is on a granted land use right. And so, we have a 
complete system of real estate development and transfers based 
upon this term of years.
    Now, this is not all that unusual as compared to the 
American system today. Today, shopping centers and office 
buildings, many downtown areas, are completely are given over 
to long-term ground use. I believe that probably a substantial 
portion of the State of Hawaii also is given over to ground 
leases and, in many parts of Pennsylvania, substantial areas 
are given over to long-term ground leases. So, this is not an 
unusual concept in the West. It is certainly possible to have a 
viable development system with this kind of a base.
    Now, do we have one in China? As I suggested, the problem 
in China has been one of ``playing catch up.'' I think it is 
best to discuss it in connection with the three major areas of 
real estate 
development.
    The first is commercial real estate. We have seen this 
development happen in the urban and suburban areas. Development 
started first in these areas when real estate regulation 
affected these areas first.
    There has been substantial investment. Anybody who has been 
to China must recognize that. The basis for the development, 
however, has been somewhat different from that which we have 
known in this country. Consequently, maybe it is not as much a 
dependence on some of the laws that we see as significant here. 
The reason for that is that a great deal of investment in China 
is equity investment.
    There is not that much lending as compared to the amount of 

investment that goes on. The equity investment is done by the 
expatriate Chinese, by government entities in other parts of 
China investing in the major urban areas. They say large 
portions of the Pudong, for instance, are owned by the county 
and city governments of various parts of China.
    The characteristic of having equity owned properties is 
that they are not as vulnerable to economic cycles, because the 
people who own the properties can just hang in there. They are 
not beholden to the banks. Another characteristic is that they 
do not have to worry quite so much about the vulnerability of 
banking systems and failures of them, at least with respect to 
the buildings themselves, although the businesses in those 
buildings, of course, may be operating on borrowed funds.
    But a negative characteristic is that--well, I think in 
this country, one reason that our real estate system is so 
sound and our system of real estate regulation is the 
predictability that we have about behavior in the system and 
the accuracy of our land records, all as a consequence of 
lenders who are very risk averse and require high standards on 
the transactions on which they lend.
    We are not seeing that as much in China as we would in the 
United States at the same level of development, and, 
furthermore, I think that not as much as we probably will in 
the future. I suspect that we will not see as much equity 
investment as the Chinese 
system becomes reliable enough to attract lending capital.
    I think the biggest test, nevertheless, for the commercial 
real estate system is, as for any legal system, what happens 
when the bubble bursts? Anybody who has done business in this 
country in the real estate area knows that it is a reciprocal 
market. There is a demand. The demand, then, is met on a time 
line that is 5 or 10 years in development.
    And by the time all the demand has been met, it has been 
over met, and we have a surplus of supply. We are starting to 
see that in certain cities in China. Sooner or later, just as 
we have in this country, we will have major real estate bubble 
bursting. And the question is, whether the legal system, which 
really is not as strong and as predictable as we would like, 
will be able to track the price, protect the investments when 
there is not enough money to go around.
    It is quite easy to make mistakes and to patch them up when 
the property is on an upward track. It is quite different when 
there is not enough money to go around.
    In the last 3 or 4 years, we have seen massive development 
in residential real estate in China, perhaps unprecedented 
anywhere in the world, at any time in the world. To listen to 
the real estate executives in China talk, they are telling us 
that 80 percent of urban Chinese now own their own home. That 
is a much higher percentage than the number of Americans who 
own their own homes. Or if not much higher, that is higher.
    I am dubious about the number, but I think there is no 
question that an extraordinary number of Chinese people in the 
last 4 years have moved from housing that was not their own 
into housing for which they do have a land use right or 
participate in a land use right on a more or less condominium 
basis.
    What I find intriguing about this development is that it 
promises the possibility of a sense of ownership, a sense of 
individual autonomy for an individual Chinese citizen, that, 
perhaps, has not been experienced by a individual Chinese 
citizen of the middle class or a lower middle class person at 
any time in Chinese history. And I think the ramifications of 
this kind of sense of autonomy for the development of a sense 
of political awareness, and eventually, a development of a 
demand for human rights coming from the Chinese citizens 
internally is quite gratifying and quite promising. And I 
really hope we see that start to occur, and I do have some 
suggestions I can talk about later as to how that might be 
assisted here.
    With respect to rural real estate, one of my colleagues on 
this panel will address that issue. All I would say, again, is 
the development that has occurred only in the last 1 or 2 
years, that we are seeing massive conversion of property that 
had been traditionally put over to the household responsibility 
system. It has begun to converge into some other kinds of 
ownership and other kinds of development with very little 
evidence that the peasants, the people who originally had 
control over these lands, are benefiting from these 
conversions.
    And that is a matter of terrific concern to me, and I 
believe it to be a matter of great concern to the Chinese. I 
know there has been a recent new development in the legal 
system concerning that.
    I want to make one more quick point, which is that it is 
important for anyone who thinks about Chinese law and the 
development of Chinese law to understand that legal power in 
China is widely distributed. The popular U.S. image of the all-
powerful monolithic central government--this is not an accurate 
picture of China in the area of economic rights.
    It is one thing to say that where local, county, and 
provincial government overlords have interests that are 
parallel with those of the national government, there seems to 
be a strong enforcement of the will of the national government. 
All of these people have an interest in power, and where they 
coincide, the power is going to come down very hard on the neck 
of the average citizen.
    However, when we are talking about economic interests, the 
local and provincial governments have profits in mind. And 
there is no question that their interest in maintaining 
autonomous control over development and the rules that govern 
that development often conflict with the interest of the 
national government in having a transparent, predictable legal 
system that, basically, is the rule of law. And so, I think 
that if we do not see rule of law in some of the rural areas, 
we are disappointed in the performance of the Chinese legal 
system with respect to protection of individual investors' 
rights and property rights.
    But we have to be concerned that we not necessarily hold 
the central government policies to blame for that. There is a 
great deal of distributed power within the Chinese system.
    [The prepared statement of Mr. Randolph appears in the 
appendix.]
    Mr. Foarde. Pat, thank you very much.
    I neglected to mention that my colleague, Mark Christopher, 
who is sitting in the second row, will keep us all on the 
straight and narrow when it comes to time, by giving you a 
warning when you have 2 minutes left, and then holding up a red 
card when your time is up. We will all try to stay very close 
to that.
    Our second speaker this afternoon is Brian Schwarzwalder, 
staff attorney with the Rural Development Institute. As RDI's 
China Program coordinator, Brian has managed two nationwide, 
random sample surveys monitoring implementation of ongoing 
rural land tenure reforms in China.
    He has also assisted Chinese policymakers and legislative 
drafters in developing and implementing several laws, including 
the 
recent Rural Land Contracting Law.
    Brian comes all the way from Seattle. Thanks for coming out 
here.

    STATEMENT OF BRIAN SCHWARZWALDER, STAFF ATTORNEY, RURAL 
               DEVELOPMENT INSTITUTE, SEATTLE, WA

    Mr. Schwarzwalder. Thanks, John. I would like to, first of 
all, thank all of the members of the Commission for giving me 
the 
opportunity to speak here today.
    I would like to start by giving a very brief introduction 
to my organization and then touching on some of the highlights 
of my written statement.
    RDI is a nongovernmental land law and policy institute, as 
John mentioned, located in Seattle. We have a total of nine 
attorneys working on land law reform in a number of different 
countries. China is our main program.
    We have been involved in China since 1987. In the past 15 
years we have conducted over 800 direct, very detailed 
interviews with farm households in over 20 provinces around 
China. As John mentioned, we have collaborated with Chinese 
research partners in 
designing and analyzing two large-scale, random-sample surveys.
    I think most followers of China are aware of the impact of 
decollectivization of agriculture under the Household 
Responsibility System in the early 1980s, specifically, the 
increase in agricultural productivity and improvements in 
farmer well-being that resulted from the ability to cultivate 
individual plots, rather than working collectively. But I think 
even the closest observers of China are probably not aware of a 
recent series of law and policy reforms that are designed to 
fundamentally transform the nature of agricultural land rights 
that are held by farm households.
    Under the Household Responsibility System, ownership of 
rural land was retained by the collective farmer communes, 
typically at the village level. Farm households were allocated 
the right to a proportional share of village land, based on 
each household's 
population.
    Now, this type of collective ownership of household rights 
has been the predominant form of land tenure in China for about 
the last 20 years. But unlike the urban land use rights that 
Professor Randolph was discussing, rural land rights have been 
insecure and have not been easily marketable.
    About 80 percent of Chinese villages adopted a practice of 
periodically reallocating land among households to reflect 
population changes within the village. Under these land 
readjustments, what happened was households whose populations 
had decreased lost land, and that land was given to households 
whose population had increased, as a way of maintaining an 
overall equality among households in the village.
    The result was that no farmers could be certain of how long 
they would remain on any given parcel of land. So, in our 
interviews with farmers over the course of many years in China, 
they consistently told us three things.
    One is that land readjustments constrained long-term 
investments in land. They were not willing to make an 
investment if they were worried that someone else would benefit 
from that investment if the land were taken away from them 
through a land readjustment.
    The second was that the uncertainty created by land 
readjustments made land transactions very difficult. Again, 
people were unwilling to take on rights to land if they were 
worried that it could be readjusted away during the term of the 
transfers.
    And last, farmers told us that they preferred longer term 
rights to land. The recent reforms take very significant steps 
toward 
providing farmers with the long-term, secure rights that they 
have indicated they would prefer over the uncertainty of the 
land re-
adjustment regime.
    Most important under these reforms is the adoption of a new 
Rural Land Contracting Law by the National Peoples' Congress in 
August of last year. The law stops short of giving farmers full 
private ownership of their land. But the rights that it creates 
embody many of the important characteristics of private 
property rights. I just want to highlight some of the main 
features of the law.
    Under the law, farmers are entitled to receive 30-year use 
rights to land, backed by a written contract and a land use 
certificate. Most important, the land during the 30-year term 
should remain free from land readjustments in all except very 
rare circumstances.
    The law also provides protections for women's rights under 
the new ``no-readjustment'' regime. Women will be particularly 
vulnerable to losing land under a ``no-readjustment'' regime, 
because they are most likely to leave the household upon 
marriage, and may not receive an allocation of land in their 
new village under a ``no-readjustment'' policy. So, it is 
important that, for the first time, this law specifically 
addresses the issue of women's rights.
    In terms of marketability, the law allows a broad range of 
transactions, including lease, transfer, exchange, and 
assignment, 
assignment being a transfer of the full remaining term.
    A priority right is created for members of the village in 
which the land is located. But transfers to nonvillagers are 
also allowed under the law.
    Transfers and assignments are treated somewhat differently. 
A transfer of less than full remaining term does not require 
any approval by the collective land owner. Whereas, an 
assignment of the full remaining term, essentially the 
equivalent of a sale in our system, does require approval of a 
collective land owner.
    Under previous laws and policies, the rules governing all 
types of transactions were very unclear. So, these new 
guidelines should really provide the basis for the development 
of a market in long-term transfers of rural land use rights.
    In terms of the rule of law, I think the Rural Land 
Contracting Law will also make important contributions to 
strengthening the rule of law in China's rural areas. Chapter 
IV of the law provides farmers for the first time with 
actionable claims against collective officials who violate 
their land rights. It does this by listing, very specifically, 
a set of prohibited actions, and then imposing strict civil 
penalties on anyone who violates those rules.
    It also envisions equitable relief for farmers. That is, 
they can forestall future activities or undo violations of 
their land rights after they have occurred.
    And in terms of resolving disputes that occur between 
farmers and collective officials, the law gives farmers the 
choice of a menu of different dispute resolution options, 
including consultation, mediation, arbitration, or direct 
filing suit in the People's Court.
    I think there are a couple of very important implications 
of the law. The bottom line is that effective implementation of 
these rights will provide farmers with the incentive to 
increase productivity and to diversify production on their 
land.
    True 30-year rights are long enough for farmers to recover 
the value of almost any type of agricultural investment over 
the course of the term, including planting of long-term crops, 
such as tree 
orchards.
    Equally important, these secured, marketable rights will 
bring to life dead capital that is tied up in China's rural 
land.
    From field work that we have done in comparable Asian 
countries--and by that I mean countries that are in similar 
stages of economic development to China and have similar 
population pressure on land--our estimate is that 30-year 
rights will attain a short-term value of somewhere between USD 
$3,500 and USD $4,500 per hectare. That is even discounting the 
fact that use rights are not equivalent in value to ownership 
rights, which are found in other Asian countries. So, if that 
level, that average value is achieved in China, that represents 
a total value for all rural land of somewhere between USD $500 
billion and USD $600 billion.
    So, placing that wealth in the hands of farmers will have 
profound impacts on rural China's economic, political, and 
social development over the long term.
    Implementation of the law, of course, represents an 
enormous challenge. We are talking about close to one million 
natural villages across China. So, it will be a long-term 
process.
    There are some recent statements from the Central 
Government in Beijing that are encouraging with respect to 
implementation. Both President Hu Jintao and Premier-to-be Wen 
Jiabao spoke at the recently concluded Rural Work Conference, 
and their statements seemed to indicate an overall increase of 
importance on rural issues, and particularly with respect to 
implementing the Rural Land Contracting Law, which was listed 
as the top priority for rural work in the coming year.
    But as Professor Randolph mentioned, in cases where local 
interests do not match up with national interests or central 
government interests, there is likely to be resistance among 
local officials in many areas. This is certainly true of 
implementation of the Rural Land Contracting Law. Local 
officials consider land to be an important source of both 
wealth and power, and are likely to resist implementing reforms 
that give farmers greater power and lessen the ownership right.
    So my organization, together with a number of Chinese 
partners, plans to stay very closely involved in a variety of 
implementation-related activities that are outlined in my 
written statement, but that include publicity for the new law, 
educating farmers with respect to what their rights are, 
monitoring implementation through additional field work and 
surveys, drafting province level implementing regulations, and 
over the long-term, developing a system of supporting 
institutions that will help farmers enforce their new rights.
    Thank you very much.
    [The prepared statement of Mr. Schwarzwalder appears in the 
appendix.]
    Mr. Foarde. Brian, thank you. It sounds like fascinating 
work. We will hear some more about it in the Q and A, I am 
sure.
    Our next panelist is Dr. James Dorn, vice president for 
academic affairs at the Cato Institute, and editor of the Cato 
Journal. Jim is an economist and a China specialist. He has 
written copiously and well on economic reform and financial 
institutions in China, and has edited 10 books, including 
``China's Future: Constructive Partner or Emerging Threat,'' 
and a book called ``Economic Reform in China.''
    Jim, welcome, and thank you for coming today.

    STATEMENT OF JAMES A. DORN, VICE PRESIDENT FOR ACADEMIC 
   AFFAIRS, THE CATO INSTITUTE AND EDITOR, THE CATO JOURNAL, 
                         WASHINGTON, DC

    Mr. Dorn. Thank you very much. Good afternoon. I would like 
to thank the Commission for this opportunity to address the 
issue of property rights in China, especially the pace of 
enterprise privatization, capital-market liberalization, and 
the implications of 
ownership reform for human rights and civil society.
    Those issues are extremely important both to China and for 
United States-China relations. The primary goal of the fourth 
generation leaders of China is basically to maintain strong 
economic growth and increase prosperity throughout China.
    However, to do so, they will have to confront a number of 
serious problems, particularly, the debt-ridden financial 
system and the inefficiency of state-owned enterprises [SOEs]. 
China's big four state-owned banks are technically insolvent, 
with nonperforming loans estimated to range from 25 to 40 
percent or more of outstanding loans. The SOEs, that is, the 
state-owned-enterprises, account for more than two-thirds of 
all bank loans in China, but produce less than one-third of the 
total value of industrial output.
    That massive waste of capital under China's socialist 
market economy cannot be stopped without fundamental reform. 
The 
biggest problem facing China today is the problem of financial 
instability. What needs to be done, I would argue, is wide-
scale, or wide-spread, privatization and the implementation of 
the rule of law.
    China's largest SOEs remain under firm control of the 
government, but many medium and small-sized SOEs, up to 
300,000, have been restructured or are being restructured. 
Moreover, since 1978, Beijing has allowed experimentation with 
different forms of ownership. They should be congratulated for 
doing so. Today, there are more than 20 types of ownership 
forms, including private firms, collective firms--for example, 
township and village enterprises, many of which are now 
private--joint stock companies, and foreign-funded enterprises, 
which play a huge role in the dynamic nonstate sector.
    The exact scope of the private sector is difficult to 
estimate or calculate because private firms often conceal their 
true identity. The law in China is very gray. It is not a black 
and white picture. So, firms often conceal their true identity, 
that is, ``wear a red hat,'' in order to gain access to state 
bank loans at subsidized interest rates, or to obtain other 
state favors.
    The private sector receives only one-half of 1 percent of 
all state bank credit in China and is heavily discriminated 
against. That is why private firms conceal their true identity.
    A reasonable estimate is that the private sector now 
accounts for one-third of China's GDP. Private entrepreneurs, 
however, have to go to the informal sector to find funds, which 
is often illegal--that is, many forms of credit allocation in 
the informal sector are illegal.
    Private and cooperative enterprises have been extremely 
successful over the past 25 years and now account for more than 
two-thirds of the value of industrial output.
    The dynamic sector, to re-emphasize, has been the nonstate 
sector, which includes private firms as well as collective 
firms and other types of firms. Their success has resulted in 
official recognition. Article 11 of the Chinese Constitution, 
which was amended in 1999, now reads, ``Individual, private and 
other nonpublic economies that exist within the limits 
prescribed by law are major components of the socialist market 
economy.'' Who would ever have thought that such a statement 
would appear in the Chinese 
Constitution?
    Private firms were illegal in 1978, and SOEs dominated the 
economic landscape. Today, there are nearly 2 million private 
enterprises employing more that 24 million workers, as stated 
in the ``Statistical Yearbook.''
    The number of private enterprises is growing by more than 
30 percent per year, especially in the coastal areas. Much of 
the growth of the private sector has been spontaneous, in the 
sense that privatization took place without central direction 
by leaders in Beijing, as opportunities for local leaders and 
entrepreneurs increased--that is, as trade opportunities 
increased, especially in the special economic zones.
    Local jurisdictions were allowed to experiment with new 
ownership forms. When they were successful, others sought to 
imitate that success. Like politicians everywhere, China's 
politicians like to imitate success. The central government 
initially did not fully support the nonstate sector.
    Only later did Beijing put its stamp of approval on the 
institutional innovations, which is why I like to call the 
development of the private sector ``spontaneous 
privatization.''
    The growth of the private sector, or private enterprise, 
occurred despite the lack of transparency in the legal regime 
and despite the severe restrictions on access to state bank 
credit, which shows the ingenuity of the Chinese people.
    Informal private capital markets have evolved to fund the 
private sector, and overseas Chinese have been an important 
source of investment funds for the foreign invested 
enterprises. Professor Kelly Tsai, who I list in the 
recommended readings at the end of my formal statement, has 
done an excellent job showing the importance of the informal 
financial organizations.
    The strong performance of provinces with greater economic 
freedom, such as Fujian, Guangdong, and Zhejiang, has created a 
new middle class and a demand for better government and more 
secure property rights. One can see this very clearly.
    Capitalists are now free to join the Chinese Communist 
Party, and several well-known private entrepreneurs are already 
members of the National People's Congress. As more 
entrepreneurs join the Party, there will be mounting pressure, 
I believe, to change the status quo.
    China's accession to the World Trade Organization [WTO] in 
December 2001 has resulted in a long-term commitment to 
economic liberalization and legal reform. The policy of 
engagement is working to change China's legal system and better 
protect property rights, and, hence, human rights. I think that 
is very important to recognize. For example, China's first 
civil code has just been drafted, including an entire chapter 
dedicated to the protection of 
private property rights.
    China's top judge, Xiao Yang, president of the Supreme 
People's Court, has called for safeguarding private property 
rights, and told a national conference in Beijing recently, 
``Efforts should be made to enhance awareness of the need for 
equal protection of all 
subjects in the marketplace.''
    At the Chinese Communist Party's 16th National Congress 
held last November, President Jiang Zemin told the new 
generation of leaders, ``We need to respect and protect all 
work that is good for the people and society and improve the 
legal system for protecting private property.'' That capitalist 
sentiment is from China's 
predominate leader.
    Jiang's rhetoric should be taken seriously, I believe. 
Chinese citizens can now own their own businesses, buy shares 
of stock, travel widely, hold long-term land use rights, own 
their own homes, and work for nonstate firms. Although the 
depoliticalization of economic life is far from complete, the 
reforms thus far have created new mindsets, expanded individual 
choices, and given rebirth to China's civil society. Anybody 
that has been to China recently can see that.
    Real reform, however, will require more than ``revitalizing 
or recapitalizing'' state-owned enterprises and state-owned 
banks; it will require a firm commitment to widespread 
privatization of state-owned assets. Until the government and 
party are shut out of banks and enterprises, corruption will 
continue and nonperforming loans will mount. What China really 
needs is not pseudo capital markets under market socialism, but 
real capital markets under market liberalism--markets in which 
shares are freely transferable and liquid, and that individuals 
trust.
    Markets work best when property is fully protected by the 
rule of law and people are free to choose. We should not forget 
the words of James Madison, the chief architect of the U.S. 
Constitution, who said, ``The personal right to acquire 
property, which is a natural right, gives to property, when 
acquired, a right to protection as a social right.''
    China is beginning to recognize the right to private 
property, but only as a right bestowed by the state, not as a 
natural, inalienable right. Consequently, private property can 
never be secure until there is a fundamental revolution in 
political philosophy that places the individual, not the state, 
at the center of the moral universe and limits the power of 
government.
    The great Chinese philosopher Lao Tzu was right when he 
said, ``When taxes are too high, people go hungry. When 
government is too intrusive, people lose their spirit. Act for 
the people's benefit. Trust them. Leave them alone.'' China's 
leaders and people can turn to the writings of Lao Tzu for 
guidance in understanding the principle of nonintervention as 
the basis for spontaneous economic and social order.
    Recent changes are encouraging. In addition to the ones 
already mentioned, the following are noteworthy: Qualified 
foreign institutional investors will soon be allowed to buy 
equity stakes in SOEs through the A-share--local currency--
stock exchanges in Shanghai and Shenzhen; strategic foreign 
investors will be allowed, for the first time, to buy the 
nontradeable shares of listed and unlisted SOEs; private 
commercial banks are being established in rural areas; farmers 
will have more secure land use rights as a result of the Rural 
Land Contracting Law adopted in August 2002; and Shenzhen, the 
first special economic zone in China, is embarking on a bold 
political experiment with Beijing's approval to limit the power 
of local cadres, introduce checks and balances, and cultivate 
the rule of law. It is no coincidence that this political 
reform would be introduced in one of the most marketized 
provinces in China.
    Those reforms and others are being driven by the need to be 
competitive in an increasingly global economy. To attract and 
retain capital in the future, China will have to continue to 
improve its institutional infrastructure, not just its 
buildings, highways, and airports.
    As China liberalizes its financial sector, removes 
remaining barriers to trade, and improves its legal structure, 
the range of choice for millions of Chinese will improve. That 
increase in economic freedom is sure to have a positive effect 
on creating what Liu Junning, an independent scholar in 
Beijing, has called, ``a constitutional order of freedom in 
China.''
    The United States can help transform China by continuing 
the policy of engagement, by ensuring that China honors its WTO 
commitments, as well as its bilateral trade agreement with the 
United States, and by adopting a more liberal visa policy that 
allows 
Chinese students and scholars, especially those in law, 
economics, and the humanities, to learn about and experience 
firsthand a free society.
    Thank you very much.
    [The prepared statement of Mr. Dorn appears in the 
appendix.]
    Mr. Foarde. Thank you very much, Jim.
    Our final panelist this afternoon is Mark Cohen, attorney-
advisor in the U.S. Patent and Trademark Office [USPTO] here in 
Washington. As an attorney with the USPTO, Mark's 
responsibilities 
include training and consultations on standards for 
intellectual property enforcement, especially with respect to 
East Asia and South Asia. He has written extensively on Chinese 
intellectual property law since 1984, and most recently edited 
a volume entitled ``Chinese Intellectual Property Law and 
Practice.'' Before joining the USPTO, Mark was a managing 
partner of the Guangzhou, China, office of a U.S. law firm.
    Mark, welcome and thanks for coming this afternoon.

 STATEMENT OF MARK A. COHEN, ATTORNEY-ADVISOR, U.S. PATENT AND 
                TRADEMARK OFFICE, WASHINGTON, DC

    Mr. Cohen. Thank you, John. It is a little bit humbling to 
talk after ``dirt lawyers'' and capital lawyers about 
intangible assets. I would like to thank the Commission for 
inviting me. As my friends know, I am always happy to talk 
about intellectual property rights [IPRs] in China, in any 
venue.
    In recognizing the Commission's role in monitoring 
compliance with human rights and rule of law in its 
implementing legislation, as well as its interest in WTO 
matters, the focus of my brief 10 minutes will be on the 
current state of protection of U.S. intellectual property 
rights in China and intellectual property and the rule of law. 
To a lesser extent, I will briefly highlight U.S. Government 
efforts to promote IP protection and the rule of law in China.
    I would like to say at the outset that these comments are 
my own. They are not an official statement of U.S. Government 
policy. I am not sure, in some instances, whether there is an 
official U.S. Government policy on the relationship between 
rule of law and IPR. However, they are issues that are of 
longstanding interest to me, and they contrast with some of the 
issues that you have just heard today. I am talking about 
legally-created intangible assets, not tangible assets.
    Unlike commercial property, IPRs have a well-defined, clear 
WTO context. IPR is also unlike land, where the primary 
constituency is China's own citizenry. It seems very often when 
we talk about intellectual property, the primary, but not the 
only constituent, may be foreigners: foreign investors, and 
foreign holders of IPRs.
    The protection of U.S. intellectual property in China was 
outlined in some detail in the December 11, 2002, report of the 
U.S. Trade Representative [USTR] to Congress on China's WTO 
compliance. That report, and I think most of the people who 
testified in preparation for it stated that a large number of 
China's laws on the books are basically WTO compliant. These 
laws basically meet the WTO minimum standard contained in the 
Trade-Related Aspect of Intellectual Property [TRIPS] 
agreement.
    The clearest deficiency is enforcement. As explained by one 
trade association, ``effective enforcement against IPR 
infringement in China is universally recognized as the chief 
concern of IPR rights-holders, as piracy rates in China in all 
areas, including copyright, trademark and patents, continues to 
be excessively high.''
    One may wonder in looking at this current situation if this 
is not a case of ``deja vu all over again.'' This year marks 
the 100th anniversary of the first bilateral agreement between 
the United States and China, which was the 1903 ``Treaty for 
Extension of the 
Commercial Relations Between China and the United States,'' 
concluded at the end of the Qing Dynasty. There have been a 
succession of other agreements since then, including after 
normalization of relations with the People's Republic of China 
in 1979.
    During the past few years, we have seen a quickening of 
pace in China's march toward conforming its IPR system with 
international standards. As noted, 20 years ago it may have 
been illegal to operate a private enterprise. All that we had 
at that time was a very rudimentary trademark law. Beginning 
with the 1980s, we had a patent and a copyright law, and a host 
of other legislation on board.
    Since WTO accession, China has ambitiously promulgated, 
revised, or annulled a very large corpus of legislation, 
regulations, and rules. I sometimes say that a job I would have 
least liked to have a year or two ago would be a legislator in 
China, because the 
number of revisions and changes was enormous. Yet, despite 
these legislative efforts, U.S. industry is facing daunting 
challenges in China's market to combat frequently illegal 
operations.
     U.S. copyright industries report they are, in general, 
suffering a piracy rate of over 90 percent in the Chinese 
market, across the range of copyrighted products, including 
motion pictures, music, and software. Losses as reported in 
2001 were in the range of $1.5 billion due to piracy.
    Of course, this is easily verified by sight observations by 
anyone who has been to China. At the Xiushui Market, near the 
U.S. Embassy, or at Luowu Market on the border of Shenzhen, 
pirated motion pictures, movies, and video games, and a range 
of counterfeit products are freely available for sale, 
sometimes to the exclusion of any legitimate product. In my 
presentation, there is a slide from the Xiushui Market, where 
you can see pirated products in full view of the authorities.
    China's role as a manufacturer and consumer of pirated and 
counterfeit goods not only affects the market in China for U.S. 
products, it affects our own market, and it affects third-
country markets. In the 1990s, this was most evident when China 
was a major exporter of pirated CD-ROMS. These exports have 
since largely come under control.
    In the United States, the most objective data we have is 
the statistics of Custom seizures of counterfeit and pirated 
goods. For 4 out of the past 5 years, mainland China has been 
the leading supplier of seized goods, 49 percent last year. If 
you aggregate it and compound it with Taiwan and Hong Kong, it 
would be well over 50 percent. In the past 5 years, there was 
only 1 year in which mainland China was not in the first place.
    However, U.S. statistics do not document the full extent of 
the harm caused by these exports. Industry experts and 
consumers report the presence of Chinese exports of products 
such as counterfeit aircraft parts, counterfeit car parts, even 
whole counterfeit cars and motorcycles. Many of these cases are 
multinational in nature. Some of them involve organized crime. 
A few years back, in April 1987, there was a case involving 
counterfeit bulk pharmaceuticals from China that were allegedly 
responsible for as many as six toxic reactions in Denver.
    I am not saying that China is solely responsible for all of 
these things. In that case, a U.S. company, a distributor, was 
repackaging them. There have been a number of other criminal 
cases in the United States involving imports of Chinese 
counterfeit and 
pirated goods.
    As IP crime extends beyond the national borders, it is 
important to note that the cooperation of Chinese colleagues in 
law enforcement and in IP protection is critical. This is not a 
one-way street. For example, pirated content may be located on 
a Chinese computer for which U.S. industry needs the 
cooperation of Chinese 
authorities, as one example of the need to obtain evidence in 
multinational crimes.
    In addition, IPR crimes have been linked in many cases to 
terrorist activities. A recent article in the New Yorker 
magazine noted that in Paraguay, the source of counterfeit 
products sold by terrorist groups is largely Chinese in origin. 
There have been other articles and anecdotal evidence.
    Given this rather bleak situation, what does the future 
hold? History shows us, of course, that China had a long 
tradition before the Industrial Revolution of being a major 
innovator of new technology. I have already mentioned that 
China has committed significant efforts to reforming its laws 
as well as establishing a full range of administrative 
agencies. There are many signs that intellectual property is 
becoming more important to China.
    In 2002, for example, China became the leading country in 
the world for receiving new trademark applications. In 2001, 
there were nearly 10 times as many Chinese applications for 
trademarks in China, compared to foreign applications. Although 
imperial China lacked a tradition of protection of IPR, Taiwan 
is the third largest foreign region applying for patents before 
the USPTO, my own agency.
    So, there is a lot of positive news. As noted by previous 
speakers, there are also developing markets for intellectual 
property rights, and the government has been actively 
developing urban technology markets.
    Among the other positive trends, criminal prosecutions, 
although small, are increasing. China's leadership has also 
indicated that intellectual property is of great concern. It is 
important to note that open markets, which we all looked 
forward to in WTO accession, do have an unfortunate side 
effect. They create a greater opportunity for counterfeiters 
and pirates to ply their wares.
    Regarding rule of law, I believe intellectual property is 
the most vulnerable to ineffective legal systems of all 
property rights, as it is intangible. It is a right that is 
completely defined by law. It is important to note that China 
does not lack intellectual property laws. What China lacks 
mostly is deterrent enforcement of those laws.
    China has a vast and rather complicated administrative 
apparatus for patents, trademarks, copyrights, semiconductor 
layout 
design, trade secrets, trade dress, defective products, illegal 
use of the Internet, counterfeit tobacco, and counterfeit 
drugs, all of which implicate intellectual property rights.
    China has a specialized intellectual property court system. 
A frequent issue in dealing with intellectual property rights 
in China is determining which national or local law, rule, 
regulation, interpretation, decree, or decision, applies and is 
in actual effect.
    In addition, because of the nature of the parallel system--
you have civil, criminal, and administrative sanctions--there 
is also a question of which rule applies to which agency and to 
what extent. On the enforcement side, the lion's share of 
China's intellectual property enforcement is administrative, 
where there are tens of thousands of cases, compared to perhaps 
5,000 civil cases and perhaps 100 or so criminal cases. By 
comparison, in the United States, we had about 1,200 criminal 
cases for intellectual property rights on the Federal level 
alone for the year 2000.
    The relationship between IP and rule of law was recently 
underscored at a roundtable in October 2002, where Ambassador 
Randt indicated that the only effective enforcement in China is 
going to come from overall legal reform. Some of those seeds 
for legal reform, to a certain extent, are found in the TRIPS 
agreement itself, which requires proportionality in criminal 
punishments in the context of IP crimes, and transparency in 
administrative and judicial decisionmaking, all of which have 
an important rule of law context.
    As we seek more effective enforcement of China's IPR laws, 
civil, criminal and administrative, we should also be mindful 
of other U.S. Government policies in promoting a legal system 
that meets international standards of fairness. These goals are 
complimentary, not inconsistent.
    Effective law enforcement can be a double-edged sword. With 
China's increase in domestic rights holders, including, for 
example, trademark holders as I just mentioned, there is a 
growing likelihood that U.S. companies will find themselves on 
the wrong end of enforcement actions, frivolous or otherwise. 
Thus, it is in the interest of the U.S. Government, as well as 
U.S. companies, to 
promote the development of a legal system in China that fairly 
protects the rights of all parties and has reliable fact-
finding 
processes.
    The last thing I want to briefly mention is U.S. Government 
efforts to promote intellectual property protection. One of the 
two key issues that we are facing this year and the years ahead 
is criminal enforcement. Because of the widespread deterrent 
effect of criminal prosecution, and because of those TRIPS 
obligations, and also because of the general lack of awareness 
of IPR crimes by police officers and prosecutors in many 
countries, training law enforcement officials is a worldwide 
task and one that is very important for the U.S. Government to 
develop.
    The U.S. Sentencing Guidelines, in particular, have 
elicited considerable interest from Chinese colleagues because 
they provide a reasonable, fair, and proportional method for 
determining sentences for IPR infringers, which is consistent 
with international practices, and I believe also advances our 
goals for the rule of law, including issues such as controlling 
local protectionism. It is likely this year that there will be 
increased training in China on IPR criminal issues.
    Another emerging issue of some importance, is Internet 
copyright. As we all know, Internet usage in China is 
increasing 
dramatically. By some statistics, the Chinese language will be 
the predominant language on the Internet in the years ahead. 
Copyright protection over the Internet, as well as other forms 
of digital issues involving copyright, are increasingly 
important internationally.
    While China's recently revised copyright law and other 
regulations and interpretations do consider the impact of the 
Internet on copyright protection, the U.S. Government would 
like China to accede to the most important recent treaties of 
the Internet, the World Intellectual Property Organization 
[WIPO] Internet Treaties, namely the WIPO Copyright Treaty, and 
the WIPO Performance and Phonograms Treaty. We would also like 
China to more vigorously coordinate and enforce copyright in 
digital formats. More training in this area is also needed.
    Thank you very much. I look forward to your questions.
    [The prepared statement of Mr. Cohen appears in the 
appendix.]
    Mr. Foarde. Four fascinating presentations by four experts 
on four different aspects of this important issue.
    I would like to start out the questioning, because time is 
short, and just ask one. I think this is for Pat Randolph, but 
perhaps someone else would like to step up to it.
    Pat, what type of registration system of the land rights 
that are now available to Chinese citizens is in place, if any?
    Mr. Randolph. Yes. The system of public records for Chinese 
land rights is really quite well developed. It is called a 
registration system. Basically, the registration of the 
interest confirms the 
validity and existence of the interest. And so, actually, it 
gives far more protection of the rights to register than the 
U.S. system or European system.
    One of the frustrations in past years has been the lack of 
access to registration records, particularly in outlying areas. 
It is very difficult to have an active market system where no 
one can figure out who owns the property or when only selected 
beneficiaries of land use can get that information.
    In response to that, and I think a very encouraging 
response, in the last 6 months China has adopted national 
policies that require public access to registration records 
nationwide.
    Mr. Foarde. Very good. We are going to be starting out over 
here on the left side with my friend and colleague, Keith Hand.
    Mr. Hand. Thank you all for your presentations.
    Jim, you flagged China's financial crisis as the most 
pressing issue in China at the moment. I am wondering if there 
is any indication as to whether the government would consider 
sale of full ownership rights over the land, in part, to deal 
with this looming financial crisis. Or is that just too 
problematic ideologically?
    Mr. Dorn. Well, it is not really a question of ownership 
rights over the land. I think they are moving in that 
direction, as Brian pointed out. They expect to have fully 
transferable rights and markets for those property rights in 
the near future.
    The real question for the state-owned enterprises, 
particularly the large SOEs in the urban areas, is how to 
expand private trading rights. Most of the stocks listed on the 
exchanges in China are nontradeable shares. They are held by 
asset management companies at different levels of government, 
and their true value is really unknown.
    As a result of the small number of tradeable shares, the A-
share market is highly overvalued. Placing nontradeable shares 
on the market would lower prices, and that is why it has been 
opposed.
    Unless the Party and the government are divorced from 
ownership in those enterprises and SOEs are privatized, the 
incentive structure will not change. Managerial changes may 
help, but they will not cure the real problem, which is to 
value enterprises according to market criteria and to allow 
shares to be fully transferable.
    The real barrier to privatization is political, because 
once SOEs are privatized Communism will be dead, and the Party 
will lose much of its power. The Party is not homogeneous. 
There are some leaders who really want substantial reform, but 
they know privatization will be a death blow to the Party. 
There is a real dilemma, because the dynamic sector has been 
the nonstate sector, particularly foreign-funded enterprises 
and private enterprises.
    I think China's main challenge, in the very near future, is 
how much privatization to allow. The leaders may not even call 
it privatization; they may call it marketization or some other 
term. So, one has to look at more subtle changes. And that is 
why I think the announcement by Jiang Zemin at the 16th Party 
Congress--that private property should be protected--is a very 
strong signal that things are not going to stay the same. We 
should welcome China's accession to the WTO because it will put 
pressure on the large SOEs to get into shape and give China's 
leaders a justification for further reform.
    Mr. Randolph. I think that with respect to residential real 
estate, it is widely anticipated in China that present 70-year-
old land use rights will be converted to ownership rights 
before the end of the 70-year term. I think it is just a matter 
of time as the population starts to develop an awareness that 
they are investing in properties that they may not own for the 
duration of their lives or duration of their investment lives; 
that there will be pressure for this. And even today there is 
some conceit among the scholars and intellectuals of China that 
there is nothing inconsistent with socialist principles to 
permit people to own their own homes.
    With respect to development property, I think the land use 
rights are shorter in this area, and I think potential 
profitability of recent land use rights at the end of their 
terms will prevent any conversion to ownership in the short 
term.
    Mr. Schwarzwalder. On the rural land issue, in the past, 
essentially rural land was for agricultural purposes and has 
been worthless on the market. The lack of market development is 
one reason. Everyone now realizes that there is potential value 
in rural land. The question is, who is going to capture that 
value? Will it be the central government, the collective 
owners, or the farmers themselves?
    I think, both from the experience of urban land rights 
reform and international experience, that I agree with 
Professor Randolph that there is going to be increasing 
pressure for privatization or extension of use rights.
    There basically have been two proposals put forth by 
Chinese researchers on that point. One is to nationalize rural 
land, to take ownership away from the collective and give it 
directly to the state, or essentially, to follow the urban land 
system. The other is to fully privatize the land and sell it to 
farmers at a very low price to allow them to eventually realize 
the increased value on the market.
    Both of those proposals basically, are in response to 
concerns that it is going to be the collective land owner who 
will capture the value of the land. There has been some 
momentum for the idea of nationalizing land, but so far, the 
idea of privatizing rural land really has not gained a lot of 
momentum.
    At the time that 30-year rights would be implemented under 
the Land Management Law, which was adopted in 1998, President 
Jiang made a statement that at the end of the 30-year term, he 
saw no reason why they should not be extended for an additional 
30-year term. My sense is that it is very likely that prior to 
the end of this 30-year term, that it will be extended to 50 or 
70 years, or perhaps perpetual use rights, potentially to full 
private ownership. But the rural sector will not lead the way. 
You won't get full private ownership of rural land until you 
have the transition to full private ownership of urban 
residential land that Professor Randolph was talking about.
    Mr. Foarde. Thank you. And thank you, Keith.
    In the interest of balance, we are going to go way down to 
this end of table and recognize Jennifer Goedke, who represents 
Congresswoman Marcy Kaptur, one of our Commission members.
    Ms. Goedke. I have two brief questions. One is for Mr. 
Cohen. You said that China does not lack for IPR rights. This 
the same for worker rights or internationally-recognized human 
rights. But implementation has always been a problem. Do you 
still consider China a trustworthy trade partner, even though 
they do not follow through with their own laws, let alone 
bilateral, multilateral trade agreements? Not speaking for your 
agency, of course, speaking for yourself.
    Mr. Cohen. I do not know if the question is a matter of 
trustworthy or not trustworthy, because there are so many laws 
and rules and regulations on the books, that the sheer quantity 
suggests somebody is thinking quite seriously about 
intellectual property rights. I believe there are many people 
in China who are thinking quite seriously. The battle is to 
engage the right people on the right issues to advance our 
interests and to make them realize it is in their interests as 
well.
    If you were to look at trustworthiness, for example, I 
think the weakest segment of the enforcement of intellectual 
property rights in China is copyright. And you could say that 
the reason for that is that they have the least engagement on 
that issue. The motion picture industry is suffering. Software 
is dominated by Microsoft and other U.S. makers. And also the 
music industry, although there is a native music industry, a 
lot of it is also imported and could have come from America.
    So there seems to be the least strength in that segment. 
And that may be one of the reasons we have very tepid criminal 
enforcement to deal with widespread piracy in China. But, that 
being said, there are also some positive signs. And by the fact 
that the Chinese, themselves, are filing for separate forms of 
rights and trying to enforce them, hopefully, they will be 
enforced with full regard for national treatment, for Americans 
and foreigners being treated the same as Chinese. Those are all 
positive prospects.
    Mr. Randolph. I would like to make a comment also. With 
respect to China's attractiveness as a trading partner and the 
question of corporate laws, I think that it is very important--
again, to keep in mind that where you wish to point your 
finger--I think there is concern, even in the economic area 
about uniform enforcement of laws. However, I do not think that 
is due to the lack of national policy concerning transparency 
of the legal system and 
enforceable rights in the commercial area.
    I think the concern is breaking down the resistance to that 
kind of policy that might arise because of local interests. And 
I think that the United States and China both cooperate in 
addressing that problem by attempting to produce and disperse 
legal expertise both among the lawyers and judges across China.
    I think one of the problems we have is that Chinese law 
schools today are ginning out the lawyers by the fistful, but 
they are all staying in Beijing, Shanghai, Shenzhen, and 
Guangzhou. That is where the profits are to be made, they 
perceive. And there is very little dispersal of legal expertise 
across the country. Furthermore, how much of the judiciary is 
poorly educated. And because they are poorly educated and 
because there are no lawyers presenting legal arguments to them 
about what the law really is, they are really very much more 
exposed to pressure from local government 
enterprises.
    Ms. Goedke. But, if a lawyer were to speak in opposition--
we find so many people afraid to do so, fearful of additional 
attention, shall we say, from the government--is there an 
environment for a lawyer to take a different path?
    Mr. Randolph. I think there is certainly an environment for 
a lawyer to advocate economic interests of his or her clients. 
And I think that increasing activity in generating awareness of 
the existence of the laws and the national government support 
for them across China would be very helpful. I think there are 
too many seminars in Beijing and not enough seminars in the 
outlying areas.
    I think we are at somewhat cross-purposes, because I am not 
going to argue with you about the issue of criminal justice or 
the issue of rights of free speech, or the disaffected Chinese 
who wish speak out in criticism of the government in rural 
areas. I do not think that it is a good place to be a 
dissident, nor is it a good place to get in trouble, but I do 
not think that is true with respect to advocacy of the economic 
interests of people or the economic system in China. I think 
that they are almost two systems existing 
parallel.
    Mr. Foarde. We will go back over to this side. Susan 
Roosevelt Weld is the general counsel of the Commission.
    Ms. Weld. Thanks, John. I guess there is one thing that I 
have been thinking of while listening to all of you speak, 
actually two things: one is equity, and the other corruption. 
Brian, in the rural context, I wonder what your surveys tell us 
about whether this rule about women really raises the status of 
women in the land-use system in the rural area. How about 
minorities that might live in these villages? Are they getting 
the land-use rights just like everybody else, under the 
allocation made by the local collective? And where might they 
take their claims if they have a claim of lack of equity? So, 
that is the first part.
    Mr. Schwarzwalder. We have not done detailed field work 
comparing rights that are given to minorities, as opposed to 
rights that are allocated to Han Chinese in individual 
villages, but we have done some field work, and our surveys did 
include some minority villages. And we have not discovered any 
lack of equity in that work. Essentially, the Household 
Responsibility System was one of the few reforms that really 
did reach all of China, including its heavily ethnic minority 
areas of northern Yunnan Province where we have done field 
work.
    Traditional tenure arrangements still existed for grassland 
and forest land, but on agricultural land the 30-year right 
system had largely been implemented. In terms of women's 
rights, it is an issue that under the new law is going to 
require a good deal of attention in the future. There is the 
potential for women who leave their original village and take 
up residence with their husband's village, to essentially 
become landless. But what the law does is it preserves their 
right to a proportionate share of land in their original 
household until they are granted a share of land in their 
husband's household.
    So, I think there are several steps that really are going 
to need to be taken to make that a valuable right. One is that 
we need to have a more detailed explanation in implementing 
rules of how that right is going to be asserted. And then you 
are going to need to educate women on how they can assert that 
right. And they are going to need to come up with a framework 
for asserting the right that works at the village level.
    The development of markets is going to be very important in 
terms of women's rights, because I think the most likely 
outcome, and perhaps the most favorable outcome, will be the 
development of markets where the woman, at the time of leaving 
her original household, can realize the value of her 
proportionate share by transferring it, by separating it and 
transferring it from her original household, taking that wealth 
into her new household.
    It is going to be a long-term process, the development of 
effective ways of asserting that right. But it is an area in 
which we have seen increasing awareness and increasing 
attention among legislatures and policymakers in Beijing.
    Mr. Randolph. I would like to address the issue. Well, 
actually, it is a separate issue.
    As I indicated in my paper, ask any Beijing taxi driver 
what the number one problem is in China today, and he will tell 
you it is corruption. I asked that question 10 years ago, and 
they told me it was too many people. I asked it 5 years ago, 
and they said the environment is too polluted.
    I think that is probably true in almost any urban area in 
China. People are sick and tired of corrupt public officials. 
And they want a change.
    Now, this gives me encouragement, because if the average 
person on the street believes that they can speak out and say, 
``I am tired of corruption, and I want change,'' I think that 
is the first step for China moving in the area of effective 
change.
    First, because the way these people find out about 
corruption is because of public notoriety about bases of 
corruption. The Chinese Government is permitting the population 
to become aware of corruption, because, at least at the 
national level, there is an attitude toward correcting this 
problem.
    Second, I think that American policies that have permitted 
China, and Chinese policies that have permitted the people of 
China, to develop personal wealth and hope of improving their 
personal situation. They accepted the conclusion that if a 
person is getting a benefit because of a corrupt action, that 
is a benefit that I might have, or that my children might have. 
And it makes me mad.
    Whereas, 20 years ago, someone would say, ``Well more power 
to you. I could not have that anyway.'' So, I think that the 
upward mobility of the average Chinese leads to a far lesser 
tolerance of corrupt bureaucracy. I am not saying the problem 
is going to change overnight. It is very difficult to correct 
corruption and at the same time allow public access to 
information. I think the two issues are closely correlated. But 
I think there is a will in China to address the problem of 
corruption.
    Mr. Foarde. We will go way down to the other end of the 
table and recognize Selene Ko, our colleague who is senior 
counsel for commercial rule of law on the Commission staff.
    Ms. Ko. I have a quick question for Mark, about your 
comments that the beneficiaries of strong intellectual property 
protection go to, for the most part, foreign investors and 
foreign interests. You mentioned that there is at least growing 
awareness by the Chinese Government that there is a benefit to 
stronger intellectual property protection within China to 
Chinese citizens.
    I was wondering if you would comment on the awareness among 
the Chinese public at large about the importance of 
intellectual property protection and whether there are domestic 
groups putting any sort of pressure on Chinese authorities to 
improve intellectual property protection?
    Mr. Cohen. That is a very good question. There certainly 
are 
domestic Chinese constituencies or intellectual property 
protection organizations. The preeminent group consists mostly 
of foreign-
invested companies. There is also a Chinese software group, 
Chinese musicians, and Chinese consumer groups, which are 
certainly advocates that the government listens to.
    I think it is sometimes too much to expect of the average 
citizen in any country to know a great deal about intellectual 
property rights. They do know when they are being ripped off. 
They know when they are buying a shoddy product or a 
counterfeit product. I would like to see police in China 
knowing more about protection of property rights. Most 
policemen are, however, preoccupied with other types of crimes. 
There is so much of it in China, they should have more of a 
leading role. There is also Consumers' Day, which is coming up, 
I believe, March 14, or 15. There are activities involving 
counterfeit and shoddy goods. And we would like to see more 
advance notice of Chinese rules, with an opportunity to 
comment. I found that in telling Chinese about transparency, 
they recognize that it is very important in order to 
disseminate rules and inform the public. It is not the fact 
that they would be soliciting comments, but by publishing rules 
in advance, the public would be more aware of the rules and 
regulations. I think most of the local and national IP 
authorities are very much aware of their responsibility to 
disseminate their rules, so that certainly lower-level 
officials know, but also that the population knows that they 
should be concerned with those rules. It is a very important 
part of their 
responsibility.
    You can frequently see this in training sessions. When we 
are conducting programs in the provinces, we find someone who 
is, obviously, quite skilled in talking about the law, because 
it is more or less his job to train and inform the public.
    Ms. Ko. Thank you.
    Mr. Foarde. Let me continue with a question to Jim Dorn.
    You said a moment ago that among the positive factors that 
you were talking about are the changes that have gone on in 
China recently, where the entrepreneurs have been admitted to 
the Chinese Communist Party for the first time, and that you 
thought their entry and activity in the Party would change the 
status quo.
    May I ask you to speculate a little bit about how that will 
happen? What is the dynamic of that?
    Mr. Dorn. Well, again, officially, capitalists were just 
admitted to the Party, but, unofficially, capitalists have been 
members of the Party for quite some time.
    It is another good example of how things are changing in 
China spontaneously and, only later, are officially sanctioned. 
I think it is an admission by the leadership that the private 
sector is so important that they cannot afford to leave 
entrepreneurs out of the Party.
    So, this is a victory for capitalism, or what I prefer to 
call market liberalism, because capitalism seems to be a 
politically loaded term in various countries these days. Of 
course, without a transparent legal system in China, 
individuals cannot make a lot of money in the private sector 
unless they ``buy influence'' along the way. Still, markets are 
opening and, in the next five years, the financial markets are 
going to open substantially. Moreover, with China's accession 
to the WTO, foreign firms are going to have direct distribution 
rights for the first time, which will be a tremendous advantage 
for those firms.
    And this is going to force the state-owned enterprises in 
China to become efficient or possibly face bankruptcy. There is 
really no bankruptcy law in China at this point, but experts 
are working on it now. And when they start allowing a few of 
the large SOEs to actually fail, that will be another step 
toward a real market economy.
    So, I think more and more private entrepreneurs will become 
members of the National People's Congress in the next decade. 
And the market-oriented coastal areas are going to have more 
and more influence in Beijing. As this happens, it is going to 
drive an increasing wedge in the Party between the old 
conservatives and the more reform-minded politicians.
    So, I think this is a good thing.
    Mr. Foarde. Thank you, Jim. Let us go on to Andrea Worden, 
who has not yet spoken.
    Ms. Worden. Thank you, John. I also have a question for Mr. 
Dorn. You mentioned that China is currently considering a new 
draft civil code. I am wondering if you have any specifics 
about the provisions that will enhance protection for private 
property rights, and also if you know what the time line is for 
the NPC's consideration of this new draft?
    Mr. Dorn. Right. That is a very good question.
    I think the draft civil code is extremely important. It is 
the first new civil code since 1986. The 1986 general 
principles of civil law provide no effective protection to 
private property.
    The new draft civil code has 9 sections, is about 216 
pages, and has 1,200 clauses. It has an entire section on 
private property rights. The fact that, in the world's largest 
Communist country, there is a new draft civil code on private 
property rights is extremely important. Of course, we do not 
know whether the code will be enacted as drafted; most likely 
it will not. But, as entrepreneurs become Party members, they 
are going to push for better protection, so there is a good 
chance that in the next several years private property rights 
will become more secure, as will other civil rights. The 1999 
amendment to article 11 in the PRC Constitution states that the 
private sector is important in the socialist market economy but 
does not give it equal protection.
    The fact that the draft civil code would give private firms 
equal protection and redress in the courts is revolutionary. 
Moreover, there would be a property rights registration system. 
Once people have clear title to their property, they can get 
mortgages. A capital market will develop, and new wealth 
created. And people will be empowered.
    The case for protecting private property rights is even 
found in the Chinese press. Recently, there was a very good 
article in the China Daily on the civil code, and it talked 
about establishing basic rules of a market economy. That is 
what needs to be done. The 
Chinese recognize this.
    Better protection of private property rights will increase 
human rights. The draft civil code, if enacted, would afford 
greater security for personal privacy--protecting one's 
reputation and credit information, for example. And victims of 
rights violations would be 
compensated.
    There is also a section on child labor. The draft code does 
not try to outlaw child labor, but abuses will be punished. 
Children under 16, for example, will not be able to work in 
certain jobs, but they will still be able to help support their 
families by working part-time.
    A new civil code that affords equal protection and due 
process for private owners will clarify the ``rules of the 
game'' for the judiciary. There will be published laws that 
people can actually point to, which will make it easier to 
defend one's rights.
    The first section of the draft civil code that is likely to 
come before the National People's Congress, perhaps as early as 
March, is the section on property rights. So, we should pay 
close attention to this.
    Mr. Randolph. I was attending a conference in Qinghua 
University in June on the law of property that is to be part of 
this code, and I provided you my translation of that. I did not 
translate those portions dealing with the household 
responsibility system, because, frankly, I do not understand 
that system. Perhaps a colleague could translate that system.
    But, I have to warn you that this is a scholar's draft. And 
the politicians have not yet gotten a hold of it. And I cannot 
guarantee that what you see is what you will get. I may have 
much of what is likely to go into the civil code. Much of what 
is in the property section of civil code is already part of 
Chinese law. A good portion of the property code is extracted, 
almost verbatim, from what is called the Security Law.
    And in addition, I believe that it is anticipated that the 
base contract law, almost verbatim, will go into the civil 
code. So, it is just kind of an elevation of maybe lower-level 
legislation into a more permanent and perhaps a more 
significant legislation. But, it is not as if a lot of this is 
new.
    Mr. Cohen. If I could add one thing to that. Past 
experience suggests that sometimes when these civil codes are 
drafted there is a sacrifice of interest in IPR to general 
principles. So, it may not all be to the good.
    Mr. Schwarzwalder. Just to also add one thing with respect 
to the rural issue. We also commented within the property law 
that there is a specific section on rural land rights. And, 
again, there is very little in that section that will differ 
from what is incorporated into the Rural Land Contracting Law.
    The property laws are the next level up, representing 
broader principles, and then filled in with subsidiary 
legislation, such as the Rural Land Contracting Law.
    Mr. Foarde. To have the last word, because our time is 
running out very quickly, let me recognize Keith Hand.
    Mr. Hand. Jim, you mentioned during your presentation that 
property rights are not viewed as a natural right in China, but 
instead as a concession of the state. Obviously, this makes 
them subject to state interest and third-party interests on an 
ongoing basis. This will be a question to all of you on the 
panel.
    I am wondering if you have seen any evidence that the 
Chinese Government, the academy, or even the public at large, 
are beginning to talk about property rights as a natural right? 
Or is that subject not even within the realm of discussion?
    Mr. Dorn. Well, that is a good question.
    Actually, I had cited Liu Junning, an independent scholar 
in Beijing, who talks about the ``constitutional order of 
freedom.'' He actually has a Web site that discusses the ideas 
of John Locke and James Madison, who argued that the power of 
government stems from the consent of the people, and the duty 
of government is to protect life, liberty, and property. These 
ideas are being discussed in China, but not without personal 
risk.
    There is a journal, ``Res Publica,'' published in China 
that has numerous articles on political philosophy from a 
classical-liberal perspective. So, market-liberal ideas are 
being discussed and, actually, one scholar who received his 
Ph.D. at Peking University--I won't mention his name--wrote his 
thesis on the idea of spontaneous order and F.A. Hayek, a 
recipient of the Medal of Freedom and author of ``The 
Constitution of Liberty,'' which has been translated into 
Chinese. The Unirule Institute in Beijing, one of the first 
private think tanks in China, actually held a seminar to 
discuss Hayek's work, which was written about in the Wall 
Street Journal. So, Chinese scholars are being allowed to work 
in these areas, but there are risks.
     Recently, I wrote an article about privatization for 
Caijing, a leading business magazine in China. I was pleased to 
learn that the editor had already published several other 
articles on privatization by leading Chinese scholars. So, she 
has the support of certain people within the government who are 
allowing her to do this. Other people would like to see her go 
out of business, but there is this split. We should not think 
the Communist Party is homogeneous; there are those who favor 
reform and those who oppose it.
    Mr. Foarde. Well, with that, my friends, I think we have 
far from exhausted the topic, but exhausted everyone here. And 
so I would thank our panelists, Jim Dorn, Mark Cohen, Pat 
Randolph, who has already gone off to catch his airplane, and 
Brian Schwarzwalder for joining us and sharing these insights 
into these very important issues with us.
    This concludes our issues roundtable for today. We hope to 
have another at the end of the month. So, please watch our Web 
site and sign up for our distribution list, if you want to get 
information about it. We should have more information available 
in a couple of days. Thank you all for coming. Good afternoon.
    (Whereupon, at 4:33 p.m., the roundtable was concluded.)
                            A P P E N D I X

=======================================================================

                          Prepared Statements

                              ----------                              

             Prepared Statement of Patrick A. Randolph, Jr.

                            february 3, 2002
    I am an American academic and lawyer specializing in real estate 
law, including leasing, finance, development and title issues. I have 
served in the leadership of the American Bar Association Section on 
Real Property, Probate and Trust Law for many years and have published 
eight books and scores of articles on American real estate issues.
    Ten years ago I was invited to teach Real Estate Law at Peking 
University, and thus began an interest in the development of Chinese 
real estate law that I observed in its beginning stage at that time. 
Since then, I have traveled to China frequently and have invited 
Chinese scholars to collaborate with me in America. I have co-authored 
a book and a number of articles on Chinese Real Estate Law and have 
lectured on real estate topics at most of the major Chinese law 
schools. I have established academic programs for Chinese students in 
America and for American students in China. Recently, I have 
participated in the Center on Chinese Land Law and Policy at Peking 
University, which will develop a central source of information in 
English and Chinese, regarding developments in Chinese Real Estate Law, 
and to provide a resource of American expertise on real estate matters 
for Chinese practitioners and policymakers. I will serve as co-Director 
of the Center.
    My book, Chinese Real Estate Law, published by Kluwer International 
Law Publishers, is the only book length treatment of this topic in 
English written by someone with background in real estate law practice. 
I attempt to synthesize the various sources of Chinese law to suggest 
the way Chinese law would address problems of concern to persons 
involved in market real estate transactions.
    I do not speak or read Chinese, and my expertise is based upon 
collaboration with Chinese lawyers and academics who speak English. 
Although this necessarily is a limitation on my development of any true 
expertise, I can say that at the elite Chinese law schools I have been 
able to interact with students and academics from every part of China, 
have obtained insights that one might not obtain from government or 
business organs.

               1. Overview of Chinese Real Estate System

                           1.1. introduction
    Until 1988, there was one simple law of real estate in China--the 
government owns everything. Although the government divided its control 
of the land resources in China into different compartments and vested 
various governmental elements with responsibility and control, there 
were no individual rights in land and any 
arrangements that had been made could be unmade by government fiat.
    In 1988, China amended its Constitution to provide for the 
recognition of privately owned transferable rights in land. Although 
the Chinese Constitution does not have the same force of law that the 
American Constitution does, this change was an important symbolic step, 
and presaged an array of changes in governmental statutes and 
regulations that implemented a system of private ownership and exchange 
of real estate. The developmental process was slowed by political 
unrest in China occurring also in 1988, and when I arrived in 1992, 
China was just beginning to act on the development opportunities 
offered by the legal changes.
    Since 1992, there has been real estate activity in China's cities 
on a scale perhaps unequaled in human history. Certainly the legal 
system that has been developed since 1988 has been a critical element 
in accomplishing this real estate activity, but the physical 
development has surged far beyond the legal development.
    China has some law in place, and there certainly is recognition and 
protection of ownership. Private bargains can be struck with some 
degree of assurance that the law will enforce them. Lenders have some 
clarity of right to reach security given for loans. But there is little 
certainty, on a nationwide basis, that the rights technically 
recognized in the Chinese laws will be fully recognized by those who 
administer the Chinese legal system, although there is steady 
improvement in this area.
    Perhaps more important is the fact that the Chinese real estate 
system has yet to undergo the test that will come when the ``first 
bubble bursts''--when China's real estate market experiences the 
inevitable economic correction that must come as part of the cycle of 
economic activity. It is only then that we will know how well the 
rights and expectations created by the system will stand up to the 
pressures of political expediency. We have had the same ``test of 
fire'' of the legal system in this country a number of times during our 
history, and each time we have identified weakness that needed 
correction.
    In short, the existence of a ``rule of law'' cannot be proclaimed. 
It must be experienced. It must be measured again and again as new 
pressures arise to test its stability. No social system is immune from 
such tests, and no legal system responds to these tests perfectly. 
Since the system of private rights was first established, China has yet 
to experience its first real test.
                1.2. basic characteristics of the system
    The basic building block of the U.S. real estate economy is 
perpetual and relatively comprehensive ownership. The ``fee simple 
absolute'' is an ownership interest in land that can be transferred and 
inherited indefinitely into the future. It cannot be said to be 
``absolute ownership'' because land rights in America are subject to 
rather extensive government regulation. But that which is not regulated 
or limited by the rights of other landowners is owned outright. This 
basic concept permits enormous flexibility in the American economic 
system. Those who hold such rights can divide and redivide these 
interests in thousands of ways, and our complex private economy attests 
to the inventiveness of American property owners to find the highest 
and best use of various aspects of land ownership.
    By contrast, the basic element of ownership of Chinese land is far 
more limited. The ``granted land use right'' is given for an identified 
period--40 to 70 years depending upon the purpose for the grant. 
Although, theoretically, there are some renewal rights, the time for 
renewal of any such rights is still well in the future, and the terms 
of renewal remain uncertain. The right is given by government only for 
purposes of implementing a particular use, and permission must be 
obtained to change the use. It should be noted, however, that in most 
cases these use restrictions are no different than use restrictions 
typically imposed in America through zoning and land use laws. A more 
important limitation is that speculation in raw land is restricted 
through the requirement that the user commence the required use within 
2 years. If the property is not developed, it cannot be transferred and 
in fact it may be forfeited back to the government.
    In addition, it should be noted that the land use right in China 
does not carry with it the extended package of rights to subsurface and 
above surface activities that American ownership typically has 
included. The Chinese government continues to control all mineral 
resources and air rights. Over time, the U.S. has moved to a 
significant restriction of these rights in American property as well, 
however.
    The granted land use right is similar in some ways to the long-term 
ground lease that is commonly used in America to develop commercial 
sites. The difference is that the Chinese right is obtained from, and 
reverts to, the government, rather than a private owner, and the 
consideration for the right is paid ``up front,'' and is forfeitable if 
the property is not developed.
    Chinese granted land use rights are protected from expropriation 
without 
compensation.
    China has a reasonably reliable system of registration of land use 
rights that permits identification of the owners. In an important 
recent development, China has established that there shall be 
unrestricted public access to these land records nationwide--an 
important development that western investors have been seeking for some 
time.
    Since the land use right can be transferred, China has developed a 
system of rules governing the leasing, mortgaging and sale of these 
rights. The rights can also be inherited and there are rules concerning 
division of the rights upon divorce. Generally speaking, the various 
legal rules that have been developed reflect the Chinese predilection 
to favor control and guidance from government over individual freedom 
of choice. Leases cannot be for more than 20 years. Lenders are 
strictly controlled as to how much they can lend against the value of 
the land.
    Although the relatively new Basic Law of Contract proclaims that 
the parties are free to contract as they please and that their bargains 
will be upheld, it remains to be seen whether bargains will be upheld 
that create interests that are inconsistent with the many regulations 
of the Bureau of Land Administration or the Ministry of Construction. 
For instance, one Chinese mortgage rule requires that all leases 
continue to exist following a foreclosure of the landlord's interest. 
In America, by contrast, there is extensive bargaining among lender, 
landlord and tenant with respect to the possible impact of foreclosure 
on the tenant's rights, and a wide variety of outcomes are possible. 
Another rule gives lessees a ``right of first refusal'' to renew at the 
end of the lease term or to buy if the landlord should sell the 
underlying ownership of the land. It is unclear whether this right can 
be ``bought out'' in advance, although clearly many Chinese 
transactions attempt to do this.
    The Chinese legal system still does not recognize formally many 
concepts that apparently are being developed within the transaction 
system. There is no clear 
``easement in gross,'' for instance, so it is unclear under what rights 
parties can 
extend pipelines or power lines. Although hundreds of millions of 
Chinese have moved into condominium residences in the last 5 years, 
there is no clearly developed condominium law spelling out their rights 
and responsibilities toward one another.
    There is a proposal to include a section on property rights 
(``rights in rem'') in the new Chinese Civil Code that is expected to 
be considered for adoption this year. There have also been proposals 
made by high Chinese leaders to amend the Constitution to provide 
better protection for property interests, but the nature of these new 
changes remains uncertain.
              1.3. other property rights and expectations
1.3.1. Homestead rights
    There are some rights to ``homestead properties'' that have been 
recognized as traditional interests virtually since the establishment 
of the People's Republic. These properties exist both in urban and 
rural areas. The nature and basis of the rights has always been 
somewhat uncertain, as has been their number. Homestead rights, 
however, have never been viewed as granted land use rights, and it is 
unlikely that they have much protection against appropriation by 
government. Some people with homestead rights have been able to convert 
them to granted land use rights and now have a protectable interest. 
Others lack the sophistication or resources to carry out such 
conversions, and their interests remain vulnerable.
1.3.2. Occupancy expectations
    After the Cultural Revolution, many people found themselves 
residing in or using properties as to which there were no clear rights 
of occupancy. Records had either been destroyed or never produced. As 
development has progressed, many of these occupants have been forced to 
relocate. The granting of land use rights on property that has been 
occupied in this way usually has required that the grantee pay for the 
relocation of those on the land, whether or not they had any formal 
right to be there. Twenty years ago, these persons were given quite a 
lot of informal protection through the negotiation of the granted land 
use rights.
    In recent years, the sale of granted land use rights has become an 
important source of revenue for local and provincial governments, and 
there appears to be less solicitude for ``undocumented'' occupants of 
property that is part of a granted land use right. Although in theory 
the government can require the grantee to pay the cost of relocation, I 
have heard that the bargains over such relocation have led to less 
generous settlements.
1.3.3. Household Responsibility System--Agricultural Land
    The system of granted land use rights has been used primarily in 
urban areas and for industrial and commercial development in the 
countryside. Agricultural property in the countryside has been under 
the control of agricultural collectives who have reallocated the 
property under their control to individual peasants under a system 
known as the ``household responsibility system.'' Peasants live and 
work on their allocated farm plots and have some autonomy in the 
management of their agricultural enterprises. We have heard stories 
recently of the wholesale breakdown of this system in the countryside 
as opportunities have arisen to consolidate land for purposes of 
corporate farming or industrial or commercial development. It appears 
that the individual peasants may in many cases be relinquishing their 
household responsibility ownership voluntarily for these purposes, but 
we have heard many reports that they do thereafter receive benefit from 
the reapplication of the property to other purposes that one would have 
expected them to enjoy as members of the Collective.
    This problem may be a problem of failure to enforce legal rights 
and it may be a problem of simple fraud and sharp dealing by leaders in 
these countryside Collectives. Reports are, however, that the 
phenomenon is widespread in rural China.
    A very recent new statute addressing some of these issues has been 
passed, and is discussed by another panelist. It remains to be seen 
whether the statute will be effective to slow down what appears to be a 
widespread movement.

             2.0. Problems with enforcement of legal rights

              2.1. the problem of diffusion of legal power
    It is important to recognize that legal power in China is widely 
distributed. The popular U.S. image of the all-powerful monolithic 
central government is not an accurate picture of China in the area of 
economic rights. It is true that there is a tradition of overbearing 
government control in China, and consequently when central government 
and local government interests coincide, or at least do not conflict, 
it would appear that the Central Government has the power to effect 
strong controls over the population.
    But in the area of division and management of economic resources 
such as land, there often are conflicts between the Central Government 
and provincial and local authorities. The Central Government lacks the 
political and social strength to prevail in many of these conflicts. 
Thus, even when the Central Government proposes a system of legal 
rights and expectations that may be sufficient to form a basis for a 
successful market system, it is up to the Provincial and local 
governments to provide effective enforcement mechanisms to insure that 
the system really works. In Guangzhou, Shanghai, Beijing, and other 
important commercial centers, there is recognition that a transparent 
legal system is vital to attracting investment capital and encouraging 
economic risk taking. Consequently, the legal system tends to follow 
the dictates of the Central Government rules, although extensive 
additional local control over real estate practices is commonplace. 
Often the local regulation in these areas, in fact, is benevolent, and 
assists in promoting effective market transactions by ``filling in the 
gaps'' of national rules.
    This happy story of cooperation, however, is not repeated in many 
other areas. Local, County and Provincial governments control large 
sections of the taxing 
system and control the payrolls and other benefits that support courts 
and other agencies that are nominally organs of the Central Government. 
Consequently, when conflicts arise between local government interests 
and the interest of stability and predictability in the legal system, 
judges and administrators find themselves often under intolerable 
pressure. We have heard many tales of foreclosure proceedings delayed 
into exhaustion, of transfers of land use rights without regard to 
government-required plans and pursuant to special negotiations that 
might be viewed as inconsistent with concepts of fair opportunity.
    If anything, the current frenzy of land development in China has 
increased the motive and opportunity for local leaders to ignore the 
rules in the name of expediency. Often this situation provides a 
breeding ground for corruption, and even more often individual property 
rights are frustrated by such activities. We saw similar abuses 
occurring during ``boom time'' periods in the development of our own 
country, and I suggest we should be neither surprised nor too dismayed 
that such things are now happening in China. Ultimately, as we have 
seen in the larger cities, a recognition is likely to develop that 
orderly process and clear rules will lead to greater economic 
prosperity. Egregious examples of corruption are periodically 
identified and dealt with, although cynics might argue that such 
activities are really ways of disposing of the most difficult political 
enemies rather than the most troublesome thieves.
                      2.2. addressing the problems
    As I have suggested, to a certain extent, the problems observed in 
China are ``boom time'' problems that will disappear over time. But 
certainly an important factor in these problems is the lack of 
adequately trained lawyers and judges. Often departures from the 
national system of property management and destruction of property 
rights occur because no one in the local area really understands what 
the legal rules are.
    Although there are a large number of Chinese judges, many of them 
lack formal law training and, unlike in America, even those with formal 
law training lack much experience in law practice. Further, there are 
few lawyers in many areas capable of insuring that their clients' 
interests are protected by law. The concept of the rule of law has only 
lately arrived in many Chinese provinces, and established lawyers have 
been successful by paying more attention to cultivating friends rather 
than 
advocating legal principles.
    There is a need to educate lawyers in many areas of China as to the 
nationally mandated rules and procedures involved in the creation, 
transfer and protection of property rights. There is a similar need to 
provide such education for judges. Further, there is a need to 
encourage capable graduates of China's law schools (which have grown 
exponentially in recent years) to move into the outlying areas of China 
and to avoid the existing concentration in the major financial centers.
                2.3. special needs in the housing market
    In a recent meeting with leaders in China's housing industry, there 
was general agreement on the need for several social or legal 
developments to occur to facilitate the continued growth and prosperity 
of private property exchange in China:

          A national system of reliable credit analysis and 
        review.
          Development of autonomous and responsible owners 
        associations in Chinese housing complexes.
          Development of an industry for the resale of 
        residential property (now most Chinese housing is still 
        occupied by the original owner.)
          Development of real estate specialization among 
        lawyers, who now are poorly prepared to address real estate 
        problems in the residential marketplace.
          Resolution of the many conflicting provisions of 
        Chinese real estate law and greater contractual autonomy in the 
        commercial marketplace.
          Meaningful consumer protection in the housing 
        development, finance, and resale markets.
          Clear rules regarding bankruptcy.
          As discussed above--adherence to national laws and 
        enforcement of those laws by courts and administrators.
                 2.4. the special problem of corruption
    China needs to continue to be vigilant in the suppression of 
corruption. In my years in China, public concern about corruption has 
become the single greatest complaint from the Chinese citizens I meet. 
Ask any Beijing taxi driver!!
    Land use rights are sold and regulated by local officials. As 
public land now passes into private hands, there are enormous 
opportunities for profiteering on two fronts. First, Chinese officials 
who generate revenues from the sale of the land have power to allocate 
those revenues. In many cases, these revenues may be used to finance 
joint venture investments by which individuals make great profits 
through the exploitation of these government funds. Although a 1998 law 
requires that proceeds from the sale of arable land be reinvested in 
the development of more arable land, there is widespread belief that 
this law is being ignored in favor of diversion of monies into other 
enterprises of more direct interest to the specific public officials 
who control the sale of land use rights.
    A second means of corrupt practice in the creation of land use 
rights, of course, is in the identification and regulation of those who 
receive land use rights. In some areas, concerns about corrupt 
practices in the awarding of land use rights to favored persons at low 
prices reached such a pitch that sale by auction was required. But 
almost as soon as the auction requirement was enacted, exceptions to 
the rules crept in that preserved the options of local officials in 
``special cases.''
    In some cases, the creation of a ``political machine'' may have the 
short run benefit of insuring stability where law may not accomplish 
that result. For instance, there is little question that most housing 
development is being carried out by favored developers who have the 
inside track on obtaining land use rights for these purposes. But the 
fact that they are on the ``A list'' may lead these developers to be 
extra cautious to insure that they actual produce the housing that is 
called for and that no scandals result in terms of shoddy housing or 
sharp practices that may jeopardize their ability to continue in their 
favored position. Indeed, we hear 
remarkably few complaints about consumer housing considering the size 
of the 
market.
    Inconsistent regulation of land use development also can be a 
problem. Since the power of forfeiture for failure to develop is so 
draconian, it is likely that there is some extortion going on where the 
possibility of forfeiture exists. The Chinese likely would be wise to 
consider less drastic interim measures to cope with problems of slow 
development in order to ease the friction at this point in the system.
    A country that lacks a free press is particularly vulnerable to 
corruption. Perhaps China's greatest challenge in the economic arena is 
to secure the confidence of its population in the fairness and openness 
of its system of economic regulation, and China's concern that 
unrestricted freedom of the press endangers stability in other areas 
makes the achievement of such confidence far more difficult.

       3.0. The significance of property rights and human rights

    It should be noted at the outset that the recognition of property 
rights in China has occurred for economic reasons--to encourage 
individual responsibility for economic decisions that will fuel an 
effective marketplace and an adequate distribution of resources. China 
wants its population to have a better physical standard of living, and 
believes that market principles may achieve that result. In short, it 
can be said that the Chinese value individual property because this is 
in the best interests of the collective.
    Although these considerations also are present in our political 
system, the recognition of property rights in America is more 
fundamental, and reflects a social and philosophical balance that is 
not necessarily a part of Chinese political philosophy. We tend to view 
our citizens as deserving of individual liberty and autonomy, and the 
recognition of private property is an important part of that personal 
autonomy. Consequently we view individual property rights as a distinct 
objective, and may sacrifice the interests of the collective in some 
circumstances in order to protect such rights.
    In evaluating the progress of individual property rights in China, 
we should maintain our focus on why China is promoting these rights, 
and not expect more from China than it is reasonable to expect.
    On the other hand, I believe that the development a greater degree 
of individual autonomy that inevitably results from the protection of 
property rights will lead, ultimately, to stronger individual rights in 
other areas of Chinese life as well. Those who have something to 
protect and preserve often seek a greater voice in government. Chinese 
government is not closed to the voices of the people. It is not as 
responsive to those voices as might be the case in a democracy, but 
neither is the Chinese government a despotic and uncaring parasite. But 
at present many Chinese citizens are ``apolitical.'' As citizens in 
China increasingly become aware that governmental policies will have a 
direct result on their opportunity to keep what they have and obtain 
what they want, they will demand a greater voice in government, and 
will demand that government respect their autonomy.
    A significant problem in this development, of course, is the fact 
that the Chinese government's second great goal, concurrent with 
economic development, is political stability. The development of 
greater citizen participation in government threatens those with 
entrenched power, and it is only a short step from perception of a 
challenge to ones power to the conclusion that government stability is 
in danger. But the development of individual property interests is so 
much a part of the economic system at present that it does seem 
unlikely that Chinese officials will take significant steps to 
frustrate such expectations. Accommodation of political change, 
therefore, is possible and it is likely that the change will be in 
favor of greater levels of individual autonomy.
    Other institutions in the society that serve to promote the market 
economy--such as the development of trained lawyers and other social 
advocates, private trade 
associations such as brokers groups and owners groups, and the free 
exchange of information that necessarily flows through a market 
economy, will lead to social 
expectation of greater power and gradual reform.
    Consequently, U.S. policy in the area of Chinese real estate ought 
to be to recognize that a healthy system of exchange of private real 
estate interests is likely to lead ultimately to demand for and 
realization of a greater individual autonomy and citizen voice in 
government in China, both goals that are critical to the greater 
development of human rights.
                                 ______
                                 

               Prepared Statement of Brian Schwarzwalder

                            february 3, 2003
    Although it has attracted scarce attention from American media, 
policymakers, and academics, in recent years China has undertaken a 
series of policy and legal reforms designed to fundamentally transform 
the nature of the agricultural land rights held by rural households. 
Because agriculture remains a primary source of income for most rural 
households, and land represents their most important asset, the success 
or failure of these reforms will have dramatic implications for the 
economic, social and political future of the more than 800 million 
people that reside in rural China.
         a brief overview of rural land rights in modern china
    The question of who possesses which rights to rural land has been a 
central issue in China's development over the past 50 plus years. 
Peasant support for the Communists and against wealthy landlords was an 
important factor in Mao's victory over the Nationalists in 1949. An 
early attempt at land reform, in which previous tenant farmers were 
given full private ownership, was swept aside by large-scale 
collectivization beginning in the early 1950s. The 30 million deaths 
resulting from the Great Leap Forward famines of the late 1950s proved 
that, without access to their own plot of land and the right to reap 
the profits from its cultivation, Chinese farmers lacked the incentives 
necessary to produce enough to feed the country's vast population on 
its modest arable land base--China has over 20 percent of the world's 
population but less than 9 percent of the world's arable land.
    Perhaps because of these challenges, China was the first Communist 
State to break up its collective farms. A decollectivization program 
known as the Household Responsibility System [HRS], which was 
implemented throughout China in the late 1970s and early 1980s, clearly 
demonstrated that giving farmers individualized family holdings 
resulted in increased productivity, higher incomes, better diets, and a 
narrowing of the gap between urban and rural incomes. Under the HRS, 
ownership of the land remained with the village or township, while farm 
households were granted rights to cultivate the land and retain any 
production above and beyond a contracted quota. Such ``collective 
ownership,'' with use rights allocated to households, remains the 
dominant form of land tenure throughout rural China.
    My organization, the Rural Development Institute of Seattle, 
Washington [RDI], has conducted detailed field research on rural land 
tenure issues in China since 1987. In the past 15 years, RDI 
researchers, all of whom are attorneys, have directly interviewed over 
800 farmers in more than 20 Chinese provinces. RDI has also cooperated 
with Chinese researchers in the design and analysis of two large-scale, 
random-sample surveys of farm households concerning their land rights. 
The goal of RDI's research has been to provide the Chinese leadership 
with detailed, accurate information and recommendations for legal and 
policy reforms in the system of agricultural land rights.
    RDI's initial research in China confirmed that the HRS reforms, by 
giving farmers individualized parcels from which they would reap the 
benefits, allowed them to undertake a series of short-term farming 
improvements--things like more effective weeding than had occurred on 
the collectives, more attentive application of fertilizer, and more 
concerted planning with respect to the timing of planting and 
harvesting. But farmers' use rights, while individual, suffered greatly 
from the fact that village officials could frequently and unpredictably 
``readjust'' those rights into entirely new patterns, taking away and 
granting land parcels on the basis of changes in household size. 
Because of these readjustments, farmers could never be certain of their 
tenure on any individual piece of land. They were therefore unwilling 
to make 
productivity-enhancing investments that required several years to 
recover, such as irrigation, drainage, or land terracing.
 the new rural land contracting law: strengthening farmers' rights to 
                                  land
    A series of recent legal and policy reforms has taken positive 
steps toward providing farmers with the long-term land tenure security 
they have previously lacked. The most significant of these reforms is 
the adoption of the Rural Land Contracting Law [RLCL] on August 29, 
2002. This new law represents a breakthrough in three major areas:
Basic land tenure security
    Although the RLCL stops short of providing rural households with 
full private ownership of their land, the rights it creates embody many 
of the characteristics of private property rights. The new law 
reaffirms in a very detailed way and in formal law what began as a 
broad policy pronouncement in 1993, that farmers are entitled to 30-
year (one generation) land rights. Thirty-year rights are long enough 
to recover the value of nearly every kind of agricultural investment, 
and, depending on the discount factor employed, such 30-year rights 
represent somewhere between 75 percent-95 percent of the economic value 
of full private ownership. The law further requires that rights to 
rural land must be backed by written contracts and use right 
certificates that contain certain core provisions reflecting national 
laws and policies.
    Most importantly, under RLCL Article 27, land readjustments are 
permitted only in extreme cases, such as when contracted land has been 
seriously damaged as the result of a natural disaster. Moreover, before 
a land readjustment can be conducted under Article 27, a series of 
procedural requirements designed to further limit the impact of 
readjustments rights must be satisfied. Research conducted by RDI and 
others, including the World Bank, has shown that the majority of 
farmers would welcome an end to land readjustments, and that farmers in 
the small minority of Chinese villages that have never employed land 
readjustments are strongly in favor of a no-readjustment rule.
    For the first time in any law or policy related to rural land 
rights, the RLCL specifically addresses the issue of women's rights to 
land. Because rural Chinese women typically leave their parents' 
village upon marriage to establish residence in their husband's 
village, they will be particularly vulnerable to losing land under a 
no-readjustment rule. Previously, women could expect to receive an 
allocation of land in their husband's village in the first readjustment 
following their arrival. By contrast, under the new rule, women will 
not be entitled to receive land in their husband's village through the 
process of land readjustment. They may, however, be able to obtain land 
in their husband's village in the form of wasteland (uncultivated land) 
or flexible land (a small proportion of land reserved by the village to 
compensate for additional population), if such land resources are 
available. The RLCL's solution to this problem is to provide, in 
Article 30, that a woman receives a share of land in her husband's 
village, she retains the right to a proportionate share of her parents' 
land under the concept of joint share property.
The legal framework for transactions involving rural land use rights
    In many of China's cities, burgeoning markets for 50 and 70-year 
use rights to commercial and residential land have already developed. 
In places like Beijing, Shanghai, Shenzhen, and Guangdong, these rights 
are also highly valuable. However, the same cannot be true for use 
rights to rural land.
    RLCL Articles 32-43 provide the most comprehensive set of rules to 
date 
governing transactions in rural land use rights, creating a legal 
framework for the development of markets for such rights. Transfers of 
rural land use rights were theoretically permitted under prior law, but 
the insecure nature of the rights meant that few farmers were willing 
to pay to acquire them for more than one season or 1 year at a time. 
The RLCL explicitly authorizes ``transfer, lease, exchange, and 
assignment'' of rural land use rights (Article 32). Right holders 
transferring less than the full remaining use term are not required to 
obtain the approval of the collective landowner; however, such approval 
is required for assignments of the full remaining term. A written 
contract must be entered into for any transaction of longer than 1 
year, and basic requirements for the content of such transaction 
contracts is set forth by the law. In all transactions, members of the 
collective economic entity in which the land is located possess a 
priority right, though the law is unclear as to how this right will be 
exercised.
    Functioning markets for long-term rural land use rights will 
accomplish two important goals. They will allow voluntary, gradual re-
allocation of land rights to the most efficient farm households. They 
will further allow farmers to realize the value of ``dead capital'' (to 
use Hernando de Soto's phrase) currently tied up in the land. Markets 
for agricultural land in comparable Asian settings suggest that the 135 
million hectares of rural land in China should eventually attain a 
total value of $500 to $600 billion US dollars--an average of between 
$3,500-4,500 per hectare. The combination of higher productivity and 
new wealth in the hands of farmers holds the potential to significantly 
accelerate rural economic development, which has lagged in recent 
years.
Strengthening the rule of law in China's countryside
    The RLCL holds the potential to accomplish this through a series of 
very clear and strong rules prohibiting violations of farmers' land use 
rights by local officials. It also imposes strict civil penalties on 
any such violations, including monetary damages and restitution, and 
equitable remedies to forestall or reverse the illegal action. In the 
past, farmers had no legal recourse when such violations occurred. It 
is also important that the new law allows farmers to choose between a 
variety of dispute resolution options, including consultation, 
mediation, arbitration by a specialized land contract arbitration body, 
or directly filing suit in the People's Court.
           implementing the new law: challenges and prospects
    As with any major legislative reform in China, adoption of a new 
law is merely the first step in the process. Implementation of the 
Rural Land Contracting Law in hundreds of thousands of rural villages 
represents a formidable challenge. However, very recent statements by 
new President Hu Jintao, Premier-to-be Wen Jiabao, and NPC Chairman Li 
Peng appear to indicate an increased emphasis on rural and agricultural 
issues generally, and a commitment to effective implementation of the 
Rural Land Contracting Law in particular.\1\ These strong expressions 
of support by the central government will be an important factor in 
achieving implementation of the RLCL, but significant obstacles to 
implementation persist at local levels. Many township and village 
cadres will be reluctant to loosen their grip on land by providing 
farmers the new rights created by the law. In some areas, farmers will 
be reluctant to embrace changes to the rural land system. The 
experience with implementation of previous rural land policies and 
laws, both successful and unsuccessful, indicates that the following 
eight steps can and should be taken in order to increase the prospects 
of timely and effective implementation of the Rural Land Contracting 
Law:
---------------------------------------------------------------------------
    \1\ Both Hu Jintao and Wen Jiabao delivered speeches at the Central 
Rural Work Conference, held in Beijing on January 7-8, 2003, in which 
they emphasized the importance of increasing farmer incomes, expanding 
demand and consumption by farmers, and coordinating urban and rural 
development. Four priority areas for rural work were identified at the 
conference, the first of which was the need to ``respect the status of 
farmer households as the main players on the market; implement the land 
policy and the Rural Land Contracting Law; and give farmers long-term 
and guaranteed rights to use land.'' See ``Chinese Leaders Address 
Central Rural Work Conference,'' (Jan. 9, 2003), Xinhua News Agency, 
available in LEXIS-NEXIS online data base, BBC Worldwide Monitoring 
Library.
---------------------------------------------------------------------------
1. Formulate and issue implementing regulations
    Implementing regulations will be necessary to further interpret 
several provisions of the RLCL. The most important step will be to 
unambiguously and narrowly define the ``other special circumstances'' 
under which land readjustments can be conducted (Article 27). 
Clarification of provisions governing inheritance, priority rights to 
transfer for collective members, and women's rights, will also be 
necessary. RLCL Article 64 states that ``[T]he Standing Committee of 
the People's Congress of each province, autonomous region and province-
level municipality may promulgate implementing regulations in 
accordance with this law and the practical situation in its 
administrative jurisdiction.'' Legislative departments at the province 
level should act quickly to promulgate such rules.
2. Conduct a comprehensive publicity campaign
    It is vital that the law's adoption be followed by a detailed, 
repetitive publicity campaign targeted at educating both local 
officials and farmers regarding the new rules. A variety of media 
should be used, but the two 17-province surveys on the implementation 
of 30-year land use rights under the LML indicate that television is 
the most effective medium for communicating to farmers. The subjects 
covered by the publicity campaign should include rules concerning land 
readjustments, the newly detailed rights to conduct transaction, the 
existence of the law's vital provisions on dispute resolution and 
methods for employing them, and the nature of women's rights.
3. Monitor implementation
    A comprehensive program should be established to monitor 
implementation of the new rules, including both direct field interviews 
with farm households (using Rapid Rural Appraisal methods) and an 
updated random sample questionnaire survey to be conducted using 
methodology that provides a highly detailed and accurate picture of 
implementation nationwide. The results should be quickly conveyed to 
policymakers at both the provincial and national levels, to provide 
them with information concerning the extent and nature of 
implementation of the new law, and to help them in developing targeted 
solutions to problems relating to implementation that are discovered as 
a result of monitoring efforts.
4. Establish telephone hotlines to receive and process farmer 
        complaints
    Closely related to the monitoring function, the central government 
should establish a system for receiving and processing farmers 
complaints related to illegal land readjustments and other violations 
of farmers' land-use rights. The establishment of telephone hotlines at 
the province level would be a simple, low-cost, yet effective way to 
meet this objective. Such hotlines have been widely employed in urban 
areas of China, and effective models could easily be adapted for use in 
the countryside.
5. Improve dispute resolution mechanisms
    The RLCL provides an extensive set of tools to ensure that farmers 
in fact will enjoy long-term and secure land-use rights, and that the 
rule of law with respect to rural land issues will be effectively 
implemented in the countryside. Initially, the content of these 
provisions should be widely publicized to farmers. Then, as experience 
is gathered in the early months of actual implementation, TV programs 
may be used to publicize the most common kinds of violations found, and 
actual cases where the law's provisions concerning penalties and 
remedies have been enforced. The establishment of new dispute 
resolution mechanisms, such as the specialized land contract 
arbitration body envisioned in RLCL Article 51, and the improvement of 
existing judicial and administrative dispute resolution mechanisms can 
only be viewed as a long-term objective, but will be crucial to the 
success of these reforms and the development of the rule of law in 
rural China.
6. Provide legal aid services to farmers
    At least pilot projects should be developed to provide legal-aid 
services to farmers in order to protect and vindicate their land-use 
rights under the RLCL. The functions of legal-aid personnel should 
include representing farmers before the Peoples' Court or before an 
arbitration body, as well as in consultation or mediation efforts that 
may precede litigation or arbitration where the farmer so desires (see 
Article 51). Legal-aid personnel can also serve as a source of 
publicity and information as to farmers' rights which may be more 
detailed than that provided through TV or other general media.
7. Improve registration of land-use rights and transfers
    Another subject on which at least pilot projects should probably be 
undertaken is the registration of land-use right certificates and of 
the transfers of such land use rights for periods of 1 year or more. 
Currently, land use right contracts issued to farm households are only 
registered at the time of their issuance (if at all), with no 
subsequent updating of records upon transfer, death of household 
members, land readjustment, or other changes. Both significant 
financial outlays and extensive training of personnel will be required 
to meet the long-term goal of developing an effective rural land right 
registration system. Initial pilot projects related to 
registration should be focused in locations where there has been strong 
implementation of farmers' land-use rights, and the preconditions for 
reliable longer-term transfers of such use rights from one farm 
household to another farm household have therefore been established.
8. Train local officials
    Many of the measures and activities described above involve the 
need to train 
personnel and local officials with respect to the provisions of the 
RLCL and their implementation. Such training will be needed for ``front 
line'' officials engaged in implementation both in the collective 
entity and at levels above the collective, and for specialized 
officials who may play a particular role in implementation, including 
hotline operators, Peoples' Court judges, arbitrators, legal-aid 
providers, and 
registration officials.
                      implications for u.s. policy
    Land reforms that provided secure, individual tenure rights for 
small family farmers were part of the U.S. policy agenda in post-war 
Asia. In Japan, Taiwan, and South Korea, these land reforms played a 
crucial role in achieving grass-roots development and the stabilization 
or evolution of democratic institutions. They were also a vital part of 
the economic transformations that made these three societies strong and 
reliable economic and political partners of the United States.
    The adoption of the Rural Land Contracting Law presents a new 
opportunity for U.S. policy to engage with China to promote the 
importance of the respect for private property and the rule of law in 
China's development process. Among other 
initiatives, the U.S. Government should provide continuing and 
increased support for rule of law programs in China that may not 
necessarily be directly linked to rural land reforms, but will help to 
ensure their long-term success. These programs include exchanges 
between U.S. and Chinese legislators and legal scholars, training for 
Chinese judicial and administrative personnel, and funding for the 
establishment of legal aid services in China.
                                 ______
                                 

                  Prepared Statement of James A. Dorn

                            february 3, 2003
    Good afternoon. Thank you for the opportunity to address the issue 
of property rights in China, especially the pace of enterprise 
privatization, capital-market liberalization, and the implications of 
ownership reform for human rights and civil 
society.
    The primary goal of the fourth generation of leaders in China is to 
maintain strong economic growth and increase prosperity throughout 
China. To do so, they will have to confront a number of serious 
problems, particularly the debt-ridden financial system and the 
inefficiency of state-owned enterprises (SOEs). China's big four state-
owned banks are technically insolvent, with nonperforming loans (NPLs) 
estimated to range from 25 to 40 percent or more of outstanding loans. 
SOEs account for more than two-thirds of all bank loans but produce 
less than one-third of the total value of industrial output. That 
massive waste of capital under China's 
socialist market economy cannot be stopped without fundamental reform--
in particular, privatization and the rule of law.
    Pumping more funds into state-owned banks to keep them afloat will 
only postpone the day of reckoning and increase the overall cost of 
reform. Likewise, turning SOEs into shareholding enterprises, with 
government as the major owner and with most shares being nontradeable, 
will not transform those firms into profitable entities. History has 
taught us that without private ownership and the threat of bankruptcy, 
there is little incentive to reallocate capital to its most highly 
valued uses. Until State banks and enterprises are fully privatized and 
effective limits are placed on the power of government, waste and 
corruption will continue.
    China's largest SOEs remain under firm control of the government, 
but many medium- and small-sized SOEs have been restructured. Moreover, 
since 1978, Beijing has allowed experimentation with different forms of 
ownership, and there are now more than 20 types of ownership, including 
private firms, collective firms (e.g., township and village 
enterprises, many of which are private), joint stock companies, and 
foreign-funded enterprises. The exact scope of the private sector is 
difficult to calculate because private firms often ``wear a red hat'' 
and conceal their true identity in order to gain access to State bank 
loans at subsidized interest rates and other government favors. A 
reasonable estimate is that the private sector now 
accounts for about 33 percent of GDP.
    The great success of private and cooperative enterprises over the 
past 25 years--they now account for more than two-thirds of the value 
of industrial output--has resulted in official recognition of the 
importance of the nonstate sector as an engine of economic growth. 
Article 11 of the Chinese Constitution, amended in 1999, now reads: 
``Individual, private and other non-public economies that exist within 
the 
limits prescribed by law are major components of the socialist market 
economy.''
    Private firms were illegal in 1978, and SOEs dominated the economic 
landscape. Today there are nearly 2 million private enterprises 
employing more than 24 million workers, and the number of private 
enterprises is growing by more than 30 percent per year. In Shanghai 
and other coastal cities, SOEs are becoming small islands in a sea of 
private enterprise. Much of the growth of the private sector has been 
spontaneous, in the sense that privatization took place without central 
direction as opportunities for trade increased, especially in the 
special economic zones (SEZs). Local jurisdictions were allowed to 
experiment with new ownership forms, and, when they were successful, 
others sought to imitate that success. Only later did the central 
authorities put their stamp of approval on the institutional 
innovations.
    The growth of private enterprise has occurred despite the lack of 
transparent legal title and restrictions on access to State bank 
credit. Informal private capital markets have evolved to fund the 
private sector, and overseas Chinese have been an important source of 
investment funds. The strong performance of provinces with greater 
economic freedom, such as Fujian, Guangdong, and Zhejiang, has created 
a new middle class and a demand for better government and more secure 
property rights.
    Capitalists are now free to join the Chinese Communist Party, and 
several well-known private entrepreneurs are already members of the 
National People's Congress. As more entrepreneurs join the party, there 
will be mounting pressure to change the status quo. At the 16th 
National Congress of the CCP in November 2002, President Jiang Zemin 
gave a clear signal that the private sector is an important part of 
China's future. He said, ``We need to respect and protect all work that 
is good for the people and society and improve the legal system for 
protecting private property.'' The party charter now includes ``The 
Three Represents''--a doctrine that commits the party to embrace ``the 
fundamental interests of the majority of the people,'' not just the 
proletariat.
    Chinese citizens can now own their own businesses, buy shares of 
stock, travel widely, hold long-term land use rights, own their homes, 
and work for nonstate firms. The depoliticization of economic life is 
far from complete, but the changes thus far have created new mindsets 
and expanded individual choice. The many restrictions and human rights 
violations that remain should not detract from the progress China has 
made since 1978 in raising the standard of living for millions of 
people and giving rebirth to civil society.
    China's accession to the World Trade Organization, in December 
2001, has 
resulted in a long-term commitment to economic liberalization and legal 
reform. The policy of engagement is working to change China's legal 
system and to better protect property rights and, hence, human rights. 
At the 16th party congress, Jiang called for improving markets 
(including ``the capital market'' and ``markets for property rights''), 
abolishing ``trade monopolies and regional blockades,'' and 
deregulating interest rates. The outgoing leader of the world's largest 
communist party told the new leaders, ``We must give full scope to the 
important role of the non-public 
sector.''
    That rhetoric should be taken seriously. The nonstate sector is 
providing a safety net for unemployed workers from SOEs. As 
restructuring takes place, China will need a rapidly growing private 
sector to maintain strong economic growth. Strengthening the private 
market sector will require a clear commitment by the national 
government to giving equal protection to private property rights and to 
liberalizing capital markets so that entrepreneurs have access to 
domestic capital that is now locked up in inefficient SOEs. Real 
reform, however, will require more than ``revitalizing'' SOEs and 
``recapitalizing'' state-owned banks; it will require a firm commitment 
to widespread privatization of state-owned assets. Until the government 
and party are shut out of banks and enterprises by privatization, 
corruption will continue and NPLs will mount. What China needs is real, 
not pseudo, capital markets with freely tradeable shares, liquidity, 
and trust.
    Markets work best when property is fully protected by the rule of 
law and people are free to choose. We should not forget the words of 
James Madison, the chief architect of the U.S. Constitution: ``The 
personal right to acquire property, which is a natural right, gives to 
property, when acquired, a right to protection as a social right.'' 
China is beginning to recognize the right to private property, but only 
as a right bestowed by the State not as a natural (inalienable) right. 
Consequently, private property can never be secure until there is a 
fundamental revolution in political philosophy that places the 
individual, not the state, at the center of the moral universe and 
limits the power of government.
    Recent changes, however, are encouraging:

         Qualified foreign institutional investors will be 
        allowed to buy equity stakes in SOEs through the A-share (local 
        currency) stock exchanges in Shanghai and Shenzhen;
         Strategic foreign investors will be allowed for the 
        first time to buy the nontradeable shares of listed and 
        unlisted SOEs;
         Foreign joint-venture investment funds will begin 
        operation;
         Private commercial banks are being established in 
        rural areas;
         China's first civil code has been drafted, including 
        an entire chapter dedicated to the protection of private 
        property rights;
         China's top judge, Xiao Yang, president of the Supreme 
        People's Court, has called for safeguarding private property 
        rights and told a national conference in Beijing: ``Efforts 
        should be made to enhance awareness of the need for equal 
        protection of all subjects in the marketplace.''
         Farmers will have more secure land-use rights as a 
        result of the Rural Land Contracting Law adopted in August 
        2002;
         Shenzhen, the first SEZ in China, is embarking on a 
        bold political experiment, with Beijing's approval, to limit 
        the power of the local cadres, introduce checks and balances, 
        and cultivate the rule of law.
         A new think tank devoted to studying political reform 
        is planned for the Central Party School in Beijing;
         Numerous rules and regulations not in conformity with 
        WTO norms are being scrapped and there are plans to streamline 
        the central government's complex bureaucracy.

    All those reforms are being driven by the need to be competitive in 
an increasingly global economy. To attract and retain capital in the 
future, China will have to continue to improve its institutional 
infrastructure.
    As China liberalizes its financial sector, removes remaining 
barriers to trade, and improves its legal structure, the range of 
choice for millions of Chinese will increase. That increase in economic 
freedom is sure to have a positive effect on creating what Liu Junning, 
an independent scholar in Beijing, has called ``a constitutional order 
of freedom in China.''
    The United States can help transform China by continuing the policy 
of engagement, ensuring that China honors its WTO commitments as well 
as its bilateral trade agreement with the United States, and adopting a 
more liberal visa policy that permits Chinese students and scholars--
especially those in law, economics, and the humanities--to learn about 
and experience firsthand a free society.
                          recommended readings
    Business Weekly (2002) ``State-Owned Firms Open Up.'' November 19-
25: 3. (Published by China Daily.)
    Carpenter, T. G., and Dorn, J. A. (2003) ``Relations with China.'' 
In Cato Handbook for Congress: 108th Congress, 577-85. Washington: Cato 
Institute.
    Dorn, J. A. (2002) ``Liberalizing China's Financial Sector.'' 
Commentary, ChinaOnline (www.chinaonline.com/commentary--analysis/
C02120636.asp).
    --(2002) ``The Need to Engage China.'' Asian Wall Street Journal, 9 
October: A11.
    --(2003) ``The Primacy of Property in a Liberal Constitutional 
Order: Lessons for China.'' The Independent Review 7(4) (Spring): 485-
501 (forthcoming).
    Jefferson, G. H., and Rawski, T. G. (1995) ``How Industrial Reform 
Worked in China: The Role of Innovation, Competition, and Property 
Rights.'' In Proceeding of the World Bank Annual Conference on 
Development Economics, 129-70. Washington: World Bank.
    Jiang, Z. (2002) ``Full Text of Jiang Zemin's Report at the 16th 
Party Congress.'' 16th National Congress of the Communist Party of 
China, 2002 (www.china.org.cn/english/features/49007.htm).
    Kynge, J. (2003) ``Bank Reform May Give China's Farmers Their Place 
in the Sun.'' Financial Times, 10 January.
    --(2003) ``Chinese Politics.'' Financial Times, 13 January: 9.
    McGuckin, R. H., and Dougherty, S. M. (2002) ``Restructuring 
Chinese Enterprises: The Effects of federalism and Privatization 
Initiatives on Business Performance.'' Research Report R-1311-02-RR. 
New York: The Conference Board.
    Meng, Y., and Shao, Z. (2002) ``Private Property Owners Win with 
Reform.'' China Daily, 24 December: 3.
    Oi, J. C., and Walder, A. G., eds. (1999) Property Rights and 
Economic Reform in China. Stanford, Calif.: Stanford University Press.
    People's Daily (2002) ``Chinese Private Economy Seeking Wider 
Development Space.'' 7 April.
    Pilon, R. (1998) ``A Constitution of Liberty for China.'' In J. A. 
Dorn (ed.) China in the New Millennium: Market Reforms and Social 
Development, 333-53. Washington: Cato Institute.
    Restall, H. (2002) ``After the Party.'' Wall Street Journal, 19 
November: A24.
    Shao, Z. (2002) ``Justice for All: State and Private.'' China 
Daily, 23 December: 1.
    Slater, D. (2002) ``Opening the Gate.'' FinanceAsia (November): 34-
37.
    Tsai, K. S. (2002) Back-Alley Banking: Private Entrepreneurs in 
China. Ithaca, N.Y.: Cornell University Press.
                                 ______
                                 

                 Prepared Statement of Mark Allen Cohen

    Thank you for inviting me here today to address the issue of 
intellectual property protection in China, particularly its status as a 
form of ``property right.''
    Recognizing the Commission's role in monitoring compliance with 
human rights and rule of law in its implementing legislation, as well 
as its continued interested in WTO matters, the focus of my brief 
presentation will be on three topics: (a) the current State of 
protection of U.S. intellectual property rights (IPR) in China; (b) 
intellectual property (IP) and the rule of law in China; and (c) U.S. 
Government 
efforts to promote IP protection and rule of law in China.
    I would like to say at the outset, that the comments I am providing 
today represent my own opinion on these important issues. They should 
not be considered as an official statement of U.S. Government policy. 
Some of the issues, such as the relationship between intellectual 
property rights in China and human rights or rule of law, are matters 
of long standing personal interest to me.
      i. protection of u.s. intellectual property rights in china
    The Office of the U.S. Trade Representative (USTR) noted in its 
December 11, 2002 Report to Congress on China's WTO Compliance (the 
Report), that apart from certain systemic issues, IP was one of three 
issues that ``generated significant problems and warranted continuing 
scrutiny''. The Report further stated:

        China did make significant improvements to its framework of 
        laws and regulations. However, the lack of effective IPR 
        enforcement remained a major challenge. If significant 
        improvements are to be achieved on this front, China will have 
        to devote considerable resources and political will to this 
        problem, and there will continue to be a need for sustained 
        efforts from the United States and other WTO members.

    A key challenge for IP in China remains enforcement. USTR also 
noted:

        Although China has revised its IPR laws and regulations to 
        strengthen administrative enforcement, civil remedies and 
        criminal penalties, IPR violations are still rampant. IPR 
        enforcement is hampered by lack of coordination among Chinese 
        government ministries and agencies, local protectionism and 
        corruption, high thresholds for criminal prosecution, lack of 
        training and weak punishments. As explained by one trade 
        association, ``[e]ffective enforcement against [IPR] 
        infringement in China is universally recognized as the chief 
        concern of [IPR] rights-holders, as piracy rates in China in 
        all areas, including copyright, trademark and patents, 
        continues to be excessively high.''

    One may legitimately wonder if this isn't ``deja vu all over 
again.'' This year in fact marks the 100th anniversary of the first 
bilateral agreement regarding protection for intellectual property 
rights, the ``Treaty for Extension of the Commercial 
Relations Between China and the United States'', (reprinted in Treaties 
and Agreements With and Concerning China 1894-1919 (J.V.A. MacMurray 
ed., 1921)). This treaty granted copyright, patent, and trademark 
protection to Americans in return for reciprocal protection to the 
Chinese. Despite the 1903 treaty, China did not introduce a substantive 
copyright law until 1910, a substantive patent law until 1912, and a 
substantive trademark law until 1923. Moreover, although these laws 
appeared on paper, they offered foreigners very limited intellectual 
property protection, and IPR issues continued to persist into the end 
of the Qing Dynasty, into the Republican period, in later dealings with 
Taiwan, and later in our recognition of the PRC.
    During the past few years, we have seen a quickening of the pace in 
China toward conformity of its IPR system with international standards. 
Since WTO accession, China has ambitiously promulgated, revised or 
annulled a large corpus of legislation, regulations, rules, etc. Yet 
despite these legislative efforts, U.S. industry is 
currently facing daunting challenges in China's market to combat these 
illegal 
operations.
    U.S. copyright industries report that they face piracy rates of 
over 90 percent in the Chinese market. They are suffering losses of 
approximately four million USD per day due to piracy. The International 
Intellectual Property Alliance details some of these piracy rates for 
2001 in its Section 301 submission to USTR as 88 percent in motion 
pictures; 90 percent in sound recordings/musical compositions, 93 
percent in computer software, and 92 percent in entertainment software, 
for total losses of $1,506.6 million.
    Economic analysis can be easily supported by sight observations. 
Counterfeit and pirated goods continue to be omnipresent in China. They 
are sold at the Xiushui Market, near the U.S. embassy, in the Luowu 
market in Shenzhen, and other prominent venues, frequently in view of 
local authorities. Some industry officials 
estimate that 15-20 percent of the products sold under their labels are 
counterfeit. For certain products, it may be difficult in local markets 
to purchase legitimate goods. Pirated music, movies, motion pictures, 
video games and books have displaced legitimate sales, frequently 
before the legitimate product can achieve legal entry into the Chinese 
market. Pictured below is such a street near the Xiushui market, where 
a street dealer in DVDs and CDs may frequently be seen.

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    China's role as a manufacturer and consumer of pirated and 
counterfeit goods not only poisons the Chinese market for U.S. 
products. It affects our own market and third country markets. This was 
most evident in the mid-1990s, when China's exports of CD-ROMs of music 
and software were displacing U.S. exports, especially in Asia. After 
extensive bilateral discussions and agreements on intellectual property 
rights, China reduced its exports of pirate CD-ROMs.
    For 4 out of the past 5 years, mainland China (not including Taiwan 
or Hong Kong) has been the top exporter of pirated and counterfeit 
goods to the United States, as measured by U.S. Customs statistics. The 
following are Fiscal Year 2002 seizure statistics from U.S. Customs:

------------------------------------------------------------------------
                                    Domestic Value
         Trading Partner                 (USD)         Percent of Total
------------------------------------------------------------------------
China...........................          48,622,997  49.
Taiwan..........................          26,507,356  27.
Hong Kong.......................           3,959,258  4.
Pakistan........................           2,362,130  2.
Korea...........................           1,825,265  2.
Indonesia.......................           1,361,101  1.
Switzerland.....................           1,274,645  1.
France..........................             836,111  Less than 1.
Malaysia........................             721,979  Less than 1.
Kazakhstan......................             671,900  Less than 1.
All other countries.............          10,847,599  11.
Total FY02 Domestic Value.......          98,990,341
Number of Seizures..............               5,793
------------------------------------------------------------------------

    According to 2002 data, China accounted for 26 percent of U.S. 
Customs seizures and 49 percent of the value. Compared to fiscal year 
2001, the domestic value of goods coming from China increased by 83 
percent and the number of seizures increased by 84 percent. In only 1 
year of the past five, China slipped to the number 2 position in U.S. 
seizures.
    U.S. statistics however do not document the full extent of harm 
caused by Chinese exports. Counterfeit goods in particular are exported 
throughout the world, depriving U.S. exporters of their legitimate 
markets. Chinese counterfeits and pirates are also a leading source of 
seizures in the European Union, Japan and many other countries. 
Industry reports that Chinese exporters have produced counterfeit 
aircraft parts, counterfeit car parts, and indeed whole counterfeit 
cars and motorcycles. Occasionally Chinese products may also be 
repackaged and sold by illegitimate distributors. Many of these cases 
are multinational in nature and can implicate U.S. companies or 
individuals. For example, in one major case prosecuted by the U.S. 
Department of Justice, the U.S. distributors of Long March 
Pharmaceuticals (Shanghai) had repackaged a bulk pharmaceutical 
product, gentomicin sulfate, not approved for the U.S. market for 
distribution in the United States. In April 1997, the distributor was 
fined a total of $925,000, and its owner was sentenced to 2 years in 
prison and fined a total of $75,000 for illegally importing counterfeit 
pharmaceuticals from China and laundering money in a kickback scheme. 
According to 
testimony before the House Commerce Committee, six patients in Denver 
alone suffered toxic reactions. See, e.g., statement of Statement of 
Patricia L. Maher, Deputy Assistant Attorney General, Civil Division, 
U.S. Department of Justice Before the Subcommittee on Oversight and 
Investigations of the Committee on Commerce, U.S. House of 
Representatives, at http://usinfo.state.gov/regional/ea/iprcn/
20001003.htm; see also http://www.usdoj.gov/opa/pr/1997/April97/
146civ.htm; http://energycommerce.house.gov/107/hearings/
06072001Hearing267/print.htm (Hearing Before the Subcommittee on 
Oversight and Investigations of the Committee on Energy and Commerce, 
House of Representatives One Hundred Seventh Congress, First Session, 
June 7, 2001, Serial No. 107-30).
    The challenges are indeed enormous. As IP crime extends beyond 
national borders, the cooperation of Chinese colleagues in law 
enforcement and in IP protection is critical. Not only are the 
commercial losses unsustainable in an era of WTO accession and mounting 
trade imbalances, but IPR crimes also feed organized crime and can 
support terrorist elements. As recently documented by Jeffrey Goldberg 
in ``Party of God'' in the New Yorker (October 28, 2002), in some 
countries, such as Paraguay, Chinese counterfeit goods appear to be 
marketed through Hezbollah and other groups. See also Rosyln A. Mazer, 
``From T-Shirts to Terrorism--That Fake Nike Swoosh May Be Helping to 
Fund Bin Laden's Network'' Washington Post, 
September 30, 2001, at page Page B2.
    What does the future hold? History shows us that China has a long 
tradition of being a major innovator of new technologies, such as 
gunpowder, the compass, irrigation techniques, and movable type. 
Chinese inventiveness was well documented by former British Consul in 
Chongqing, Prof. Joseph Needham, in his monumental Science and 
Civilization in China. Looking to the future, China has indeed 
committed significant resources to revamping its laws, establishing a 
specialized IP court system, implementing specialized administrative 
agencies with power to fine infringers, and enacting and publicizing 
laws or measures that may extend beyond TRIPS minima.

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    There are many signs that intellectual property is becoming more 
important to China. In 2002, for example, China became the leading 
country in the world for receiving new trademark applications. In 2001, 
there were nearly 10 times as many Chinese applications for trademarks 
in China compared to foreign (229,775/23,234). Markets for legitimate 
applications of intellectual property are beginning to grow. Although 
imperial China lacked a system of IPR, IP protection is not completely 
anathema to Chinese culture. Taiwan, for example, was the third largest 
foreign region applying for patents in the United States in 2001 (after 
Japan and Germany).
    The prospects are not, therefore, completely bleak. Although piracy 
is an enormous challenge, Chinese and foreign companies are investing 
in software and scientific development in China, frequently through 
science and technology parks, such as those administered by China's 
Ministry of Science and Technology. Chinese 
authorities also recognized that they are being deprived of tax revenue 
through 
piracy and counterfeiting, and that these activities erode respect for 
rule of law. Chinese consumers complain at least as bitterly as 
American companies of fake and shoddy counterfeit goods. Criminal 
prosecutions, although small, are also increasing. China's leadership 
has also taken note of many of the problems, although the focus 
primarily tends to be in counterfeiting and not in copyright where 
Chinese industry has a smaller interest. Open markets and deregulation 
have the unfortunate side effect of creating greater opportunities for 
counterfeiters and pirates to ply their wares. They may respond more 
quickly than police or government agencies that are not as well 
prepared for these types of crimes.
    To address wide scale piracy and counterfeiting, a multi-faceted 
approach--including criminal law, civil law, government, business and 
non-profit organizations, as well as public outreach and international 
cooperation--is required. Piracy and counterfeiting are worldwide 
problems and international cooperation remains critical.
           ii. intellectual property and rule of law efforts
    I believe that intellectual property is the most vulnerable to 
ineffective legal systems of all such property rights. Being 
intangible, it is a right that is defined by law and easily undermined 
by lawlessness.
    It is important to recognize that China does not lack for 
intellectual property laws. What China mostly needs is deterrent 
enforcement of its laws. China has a vast administrative apparatus 
which levies fines for patent, trademark, copyright, semiconductor 
layout design, trade secret, trade dress, defective products, illegal 
use of the Internet, counterfeit tobacco, counterfeit drugs, etc., all 
of which implicate IPRs. There are national and local laws, rules and 
regulations on IPRs. Courts and the procuratorate may issue their own 
interpretative rules. Agencies may issue their own guidance, sometimes 
in conjunction with other agencies. A frequent issue in dealing with 
IPRs in China is determining what national or local law, rule, 
regulation, interpretation, decision, guidance, notice, decree, order, 
interpretation etc. 
applies and is in actual effect.
    On the enforcement side, the lion's share of activity is conducted 
by administrative agencies which have enforcement authority. According 
to China's TRIPS Council submission, for example,

        There were 41,163 trademark law violation cases in 2001. 
        Infringers were ordered to pay the right owners damages of RMB 
        3,343,400 in total and there were 86 cases transferred to 
        criminal procedures. In respect of enforcement of the Copyright 
        Law, in 2001 copyright administrative authorities accepted 
        4,416 cases in total, among which 4,306 cases have concluded 
        with rulings. Among those concluded, 3,607 cases ended with 
        imposing a fine upon the infringers; 633 cases ended with 
        mediation; and 66 cases were transferred to criminal 
        procedures.

    By comparison, the actual number of civil cases was far smaller, 
and civil cases involving foreigners was far smaller still. In fact 
criminal IPR cases investigated under China's criminal copyright and 
trademark provisions may be a smaller 
number than those that are prosecuted in the United States, where 
piracy and counterfeiting rates are less.

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Respect for intellectual property rights, the most vulnerable of 
property rights, promotes respect for rule of law and promotes 
development of accountable administrative, civil and criminal legal 
systems. While it may be theoretically possible to have a legal system 
that does not recognize intellectual property rights, I do not believe 
it is possible to adequately protect intellectual property rights in 
the long run without an effective and fair legal system. In the past 
certain U.S. efforts regarding intellectual property rights protection 
were criticized by some academics, such as Prof. William Alford, as 
``devot[ing] considerable diplomatic capital to secure concessions that 
fail meaningful[ly] to speak to the chief impediments to the 
development in China of respect for legality and, through it, of a 
greater commitment to the 
protection of intellectual property rights.'' (To Steal A Book Is An 
Elegant Offense, p. 118). I believe such criticism is misguided.
    The relationship between IP and rule of law was recently 
underscored at a roundtable on intellectual property rights held at the 
U.S. Embassy in Beijing in October 2002, where Ambassador Randt, 
addressing industry concerns over national treatment and corruption in 
China's IPR system, clearly stated that the issues are intertwined in 
the Embassy's mission to promote both human rights and protect U.S. 
intellectual property rights. Industry also recognizes that without 
effective rule of law, intellectual property rights will not be 
accorded the full protections they are due. As an industry spokesman 
noted in hearings held by USTR in preparation of the December 11, 2002 
Report:

        [W]e all recognize that this is a process that will take time, 
        and patience. The institutional, legal, and regulatory changes 
        demanded of the Chinese are extraordinary, reaching in most 
        corners of their economy, and complicated further by a highly 
        decentralized administrative structure covering a vast, diverse 
        country.

    The TRIPS agreement itself, as well as the Working Party Report of 
China's WTO commitments, contains the seeds of these rule of law 
issues, in such key issues as transparency of rulemaking and judicial 
decisions, and in notions of proportionality of criminal offenses. 
These issues in fact, are a key part of this Commission's mandate. See 
P.L. 106-286, Sec. 302(c) 2-4, 6. Legal systems that administer light 
administrative penalties against IP criminals, while imposing harsh 
sentences on young people distributing DVDs on bicycles, corrode 
respect for rule of law and for IPR. While campaigns against piracy can 
result in focused gains for IPR, long-term systemic changes likely 
depend on an effective legal system. Proportional penalties imposed 
against violators by an independent judiciary, serve rule of law and 
IPR needs. By addressing issues such as rights of accused in criminal 
IPR cases, or the need for administrative transparency in rulemaking 
and review of patent and trademark applications, both rule of law and 
IPR protection objectives are served.
    As we seek more effective enforcement of China's IPR laws, civil, 
criminal or administrative, we must also be mindful of other U.S. 
Government policy goals in 
promoting a legal system that meets international standards of 
fairness. These goals are complementary, not inconsistent. Effective 
law enforcement can be a double-edged sword. With China's increase in 
domestic rights holders, there is a growing likelihood that U.S. 
companies may find themselves on the wrong end of 
enforcement actions, frivolous or otherwise. Thus, it is in the 
interest of the U.S. Government, as well as U.S. companies doing 
business in China, to promote the development of a legal system in 
China that fairly protects the rights of all parties and has reliable 
fact-finding processes.
    In discussing enforcement of intellectual property rights with 
Chinese colleagues I have been especially heartened by their interest 
in such matters as: sentencing guidelines for the proportionate and 
predictable determining of criminal penalties; discovery and pre-trial 
exchange of information; role of specialized courts in intellectual 
property enforcement; authority of courts to implement international 
obligations, such as the TRIPS agreement or to ``fill in the gaps'' in 
administrative rulemaking; standards for issuing preliminary 
injunctions or ex parte measures; protections against abuse of 
intellectual property rights, or against abuse of civil or 
administrative process; responsibility of lawyers to the judiciary; the 
role of lawyers in protecting confidential information in patent or 
trade secret cases; increasing technical legal exchange; the role of 
intellectual property in promoting technology development and transfer; 
protecting content over the Internet and protecting computers against 
hacking; ensuring that local administrative agencies and their 
enforcement efforts comply with national standards; and related issues.
    I can also say on a personal note, that Chinese counterparts 
respond favorably to constructive criticism of their IPR system, and 
that we have an obligation on behalf of our rights holders and in the 
interest of the Chinese people to constructively raise these important 
issues at every relevant venue.
      iii. usg efforts to promote intellectual property protection
    Many industry representatives would like to see a more active U.S. 
presence on intellectual property matters in China. There have been 
many such efforts under way by both the private sector and the 
government. All major U.S. IP trade associations are active in China to 
some extent. Many NGOs which have a general rule of law orientation 
have also recognized the intersection between IPR and rule of law 
issues. Franklin Pierce Law School ran a summer institute on IPR with 
some USG assistance at Tsinghua University this past summer. George 
Washington University Law School and John Marshall Law School also have 
extensive contacts with Chinese IPR students and experts. The Quality 
Brands Protection Committee, the United Nations Development Program, 
the copyright industries such as the Motion Pictures Association, and 
others have also run successful IPR programs. There may be many other 
programs of which I am not as aware. I have already mentioned 
Ambassador Randt's very successful roundtable in which various industry 
groups raised their concerns over China's IPR environment; the Embassy, 
USTR and other agencies, are also involved in other efforts to enhance 
the IPR position in bilateral discussion. The Embassy in Beijing has 
also recently developed an action plan to help address IPR issues, 
which should help to more successfully protect and promote US interests 
in China.
    Among recent U.S. Government programs, the USPTO, in conjunction 
with the International Intellectual Property Institute, George 
Washington University Law School and the Court of Appeals for the 
Federal Circuit hosted a number of Chinese judges this past summer at a 
conference on capacity building for specialized IP courts. The Commerce 
Department ran two IPR training programs last year in China, as well as 
a program on technology transfer, in addition to hosting Chinese 
delegations on various matters, including several from the Shanghai WTO 
Consulting Center or in meetings of the APEC/Intellectual Property 
Experts Group or at WIPO. I was privileged to be the guest of the Japan 
Patent Office this past 
December as a speaker in an IPR enforcement program it ran in Beijing.
    We are looking for further cooperation with other governments and 
with China on such programs. Where circumstances have permitted, we 
have also reached out to localities, to universities and educational 
institutions, and to Chinese entrepreneurs. Last year, I participated 
in a successful program led by Deputy Under Secretary of the Technology 
Administration of the Department of Commerce Ben Wu on IPR with the 
science and technology parks administered by the Ministry of Science 
and Technology, which entailed reaching out to these groups.
    We have the resources to deliver targeted and effective training 
programs. There are a number of Chinese speaking IPR experts in the 
U.S. Government and the 
private sector who are familiar with China's legal system and I 
believe, have been quite successful in building bridges by delivering 
programs quite effectively in Chinese without interpretation or 
translation. This approach also helps to instill greater confidence and 
respect from Chinese colleagues.
    The European Union and European Patent Office ran a well-organized, 
well-funded multi-year IPR capacity building program in China which 
ended in December 2001. A focus of many industry groups and government 
organizations recently has been criminal enforcement of intellectual 
property, including cooperation with 
Chinese counterparts. Certain rule of law initiatives, such as those 
involving rulemaking transparency by the Asia Foundation have the 
potential for clear collateral benefits to IPR protection. Because the 
TRIPS agreement itself has certain transparency obligations, these 
programs may also fruitfully begin their analysis by looking at 
international obligations and practices for transparency in an IPR 
context.
    Because of the widespread deterrent effect which criminal 
prosecution has, as well as the general lack of awareness of police 
officers and prosecutors in many countries of IPR crimes, training law 
enforcement officials, including Customs officials, is of increasing 
importance to addressing the deficiencies in China's IP system and in 
advancing the rights of Chinese and Americans alike. The U.S. 
Sentencing Guidelines, for example, have elicited considerable interest 
from Chinese colleagues as they provide a reasonable, fair and 
proportional method for determining sentences for IPR infringers, which 
is consistent with international practices, and I believe also 
advances our needs for rule of law. It is likely this year that there 
will be in increased emphasis on IPR criminal issues through training 
and consultations with our Chinese counterparts.
    Another emerging issue of some importance is protection of 
copyright over computer networks, especially the Internet. As we all 
know Internet usage in China is increasing dramatically. Copyright 
protection over the Internet, as well as other forms of digital issues 
involving copyright are important international challenges which all 
countries are forced to deal with, and which increasingly require 
international cooperation and coordination. While China's recently 
revised copyright law and other regulations and interpretations do 
consider the impact of the Internet on copyright protection, the U.S. 
Government would like China to fully accede to the WIPO Internet 
Treaties (WIPO Copyright Treaty and WIPO Performances and Phonograms 
Treaty) and more vigorously coordinate and enforce copyright in digital 
formats. I believe that training in this area, conducted by various 
U.S. agencies (such as USPTO, the Copyright Office, and the Department 
of Commerce) and 
private organizations is also of considerable importance.
    Thank you and I look forward to your questions.

                                   - 
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