The principal legislation through which Chinese corporate law is enforced is the Company Law of the People’s Republic of China. The NPC (or Supreme People’s Court) is the regulatory body enforcing this law and governs companies, businesses and accountants. However, China’s lack of legal transparency and poor protection of intellectual property rights (IPR) are key factors in the country’s low ranking as the world’s 140th-freest economy in the Heritage Organisation’s 2010 Index of Economic Freedom, which rates a country for its financial and labour freedom, protection of property rights, business licensing requirements and freedom from corrupt practices. Poor IPR protection enforcement acts as a strong deterrent to some international investors considering starting a company in China.

To highlight its poor IPR protection record, in 2006 The US Customs and Border Protection agency seized US$126 million-worth of counterfeit goods from China, 81% of all IPR-infringing goods seized at US borders that year.

Although it is a signatory to the World Trade Organisation’s (WTO) Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement, which sets standards for and helps enforce IPR protection, in reality local enforcement in China is poor and copyright infringements are a part of everyday life. This acts as a major deterrent to investors starting a company in China using proprietor technology.

China’s corporate governance standards also remain poor compared to western countries, and it ranked 2nd-last in Asia in the 2007 Corporate Governance (CG) Watch Survey by CLSA Asia Pacific Markets, ahead of only Indonesia. Despite reforms which seek to improve corporate governance standards – for example, Chinese stock exchanges now require companies to release a prospectus which conforms with accepted international accounting principles prior to listing – accountability remains low. China is criticised by the International Finance Corporation, the private sector arm of the World Bank, for the lack of a culture of accountability among Chinese companies.

Furthermore, in 2007 only an estimated 10% of Chinese firms conformed to International Financial Reporting Standards, which promote the transparent reporting of corporate financial information. This problem is exacerbated by an estimated shortage of 300,000 qualified, experienced accountants and auditors in China in 2007. Again, this discourages investors planning on starting a company in China.

Despite broad reforms since its accession to the WTO in 2001, China’s legal process remains complex and intimidating for foreign investors starting a company in China. Legislation is frequently inadequate and inconsistent, and standards of enforcement vary from province to province because provincial governments enjoy varying degrees of autonomy from the federal government in Beijing.

Furthermore, the Chinese judiciary is vulnerable to political interference, corruption and local protectionism. China has more than 3,000 basic courts and almost 200,000 judges. The legal system suffers from a shortage of qualified, experienced lawyers. In 2006, there were 120,000 lawyers in China, involved in civil and business law. However, only 52% of these lawyers received a formal legal undergraduate education, the remainder being former policemen/civil servants.

Because of the above, many foreign investors prefer to take their disputes to China’s International Economic and Trade Arbitration Commission (CEITAC), an independent body which mediates commercial disputes in more than 200 cities across China. Through CEITAC, the majority of cases are concluded in 6 months.