Bank regulatory authority in China

References

• The press in China is under strict if not absolute control of the government. Much of what is published in China is restricted to domestic consumption. Chinese visitors to the United States report that in practice any publication not specifically approved for foreign consumption is considered a state secret. Any person allowing a non-Chinese access to nonapproved publications may be subject to sanctions for espionage. Because available materials are so limited, unwarranted value is placed on their accuracy. Better sources than newspaper and magazine articles are rarely available, but neither is there any failsafe method for evaluating the accuracy of press information. The coherence of long range trends and consistency with other available sources are two of the best ways to evaluate articles in the press. Interviews with experienced and knowledgeable Chinese are often a good way to acquire a basis for evaluating information from the press. This author has been fortunate to have had access to some exceptionally well informed Chinese at the Center for Chinese Legal Studies at Columbia University School of Law.
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• See text accompanying infra nore 10.
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• See infra note 50.
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• The pre-reform system has been characterized as one of soft budget controls; see Ha Li, “Well-known Economist Dong Fureng Holds that in Order to Deepen the Reform it is Imperative to Solve the Problem of Soft Budget Control of Enterprises,” Beiiing Jinqjixue Zhoubao (Dec. 24, 1985): 1; Foreign Broadcast Information Service [hereinafter F.B.I.S.] (Jan. 10, 1986): K16.
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• On the use of economic leverage, see Ma Li, id., Bai Shui & Yu Zhongyi, "Make use of Economic lavers, strengthen Macro-control; Round up on the First National Symposium on the theory of Economic Levers", Beijing Guangming Ribao (Jan. 18, 1986): 3; F.B.I.S. (fEB. 7, 1986): k22. see also, Kuang Taiyin, "Basic conditions for Establishing Indirect Control, " Beiling Guangming Ribao, (Jan 18, 1986): 3; F.B.I.S. (Jan. 30, 1986): K22
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• Bankruptcy laws have been passed and recently revised. See "The Majority of Committee Members Join in Applauding the Interim Bankruptcy Law", Ronmin Ribao (Overseas Edition) (Nov.27, 1986); 1. These may have importmant effects on managers' working capital use because the new laws require managers to assume a greater degree of responsibility for the results of their spending.
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• with regard to the question of bank regulatory control over foreign business interests, Article 9 of the Joint Venture Loan Provisions gives legal authority to bank supervision of foreign-joint venture activities. The requirement of Article 2 of the Law of the People's Republic of China for Chinese-foreign Joint venture ) underscores this, in its requirement that foreign- oint enterprises follow Chinese law generally. Relations with Chinese banks are difficult to qvoid because of the requirement of Article 8 of the same law that joint enterprises must maintain an account at the Bank of China or another approved bank. The minimum relationship required to trigger bank jurisdiction has never been determined. If a foreign investor were to claim that the banks had no jurisdiction over foreign business in China, Chinese authorities could easily establish jurisdiction by legislating it. The banks8 regulatory authority may or may not extend to enterprises which have not obtained a loan from any Chinese bank. Since most domestic business is not conducted without bank loans, it was not anticipated that foreign-joint business would operate without bank loans either. There is no documented case of an enterprise challenging the jurisdiction of the banks to supervise its funds. The question of the source of regulatory jurisdiction would become important, however, in two situations. First, it would be important if an enterprise successfully avoided jurisdiction prior to passage of any law expressly establishing jurisdiction. Second, it would be important if the effectiveness of the exercise of jurisdiction depended on differences between alternative regulatory organizations. Then it might make a difference when and under what circumstances jurisdiction was established for regulatory control of foreign enterprises. None of these issues has arisen in any factual context and they may well be legislatively resolved before they do arise, in view of the current policy of encouraging foreign investment by passing legislation to regulate and protect it. The reason banks have not begun to exercise their authority to Itinspect and superviset1 foreign enterprises is probably that Chinese government and other authorities wish to avoid discouraging foreign investment in China, see Interim Measures of the Chinese Bank of Industry and Commerce on the Supervision of Working Capital in State Owned Industrial and Commercial Enterprises, art. 3 sac. 2. The policy of importing foreign technology takes priority for the moment over full regulatory control of foreign activities. As the methods of inspection and supervision are developing through domestic experience, the same methods of supervision can be used over foreign and foreign-joint businesses. According to one theory, bank regulatory authority extends only as far as "ownershipt9 of enterprise funds. In China a lender is considered to retain ownership of funds loaned, and thereby to acquire supervision rights over those funds. Such a theory fits in a socialist system involving numerous types of ownership. See, ItChina at Present has Eight Forms of Ownership," Renmin Ribao (Overseas Edition) (Dec. 12, 1985): 1. For discussion of changing ownership patterns, sea Lin Fuyuan, "Relative Division Means Partial Separation of Management from Ownership," Beijing Guangming Ribao (Jan. 11, 1986): 3. With China's demonstrated ability to create new forms of ownership as the need arises, if the current ownership structure is seen to inhibit bank regulatory activities, China can simply invent a new ownership form that can allow bank regulation to go forward. 9 m, Report nResearch Report 'China in the Year 2000 Portrays the Orientation of Reform of the Economic Structure and the Trends in Ownership Changem, -ai Shiiie Jinaii Daoba~ (Jan. 6, 1986) : 3; F.B.I.S. (Jan. 27, 1986) : K13.
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• These lowest level regulations are often unavailable outside of China. Even inside China their availability is restricted to peraons considered to have a need to know. Lawyers are regularly excluded from this category. examples at note 88 and 90.
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• The likelihood of enforcement by the parties is not great if the Chinese are as temperamentally averse to litigation as has been claimed. m, Schwartz, Benjamin, Iton Attitudes toward Law in China," in Katz, Milton, Government under Law and the Individual (1957): 29. Chinese people are not necessarily averse to litigation for reasons of temperament. Until recently civil court proceedings have not been accessible to most Chinese people. There are not many lawyers in China, so even an otherwise accessible court system does not provide a feasible way to resolve disputes when plaintiffs are unfamiliar with the laws and unable to get legal advice. The Chinese legal system creates a low expectation of winning in court. A more hospitable court system in very recent years has in fact persuaded more and more Chinese people to take more responsibility for insisting of enforcement of their rights. (10) For further understanding of macroeconomic controls in the Chinese context, see, Editorial, "Strengthen the Ability of the Peoplels Bank of China to Adjust the Macroeconomy," Zhonqquo Jinron 4 (April 1985) : 2; Zhang Jingtao, "Several Questions on Increaiing Macrocontrol of Finance" , id. at 22.
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• For sources on the economic leverage policy, see suwra note 5.
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• See, Editorial, Exercise Caution in Making Unified Arrangements--On the Unity of Macroscopic Control and Microscopic Flexibility," Beijig Renmin Ribao (Aug. 13, 1985): 1; F.B.I.S. (Aug. 22, 1985): K1. See also, Huang Taiyan, note 5; Zuo Mu, "How to Understand Distribution Power of Enterprises under a Commodity Economy," Benlnq Guanmins Ribao, (Jan. 6, 1985): 3; F.B.I.S. (Jan. 16, 1986): K27.
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• China, as a planned socialist economy, is governed partially by means of economic plans or budgets which are worked out by various authorities. The most important of the plans are the annual plans prepared for each organization and the five year plan prepared for the country as a whole. See Commentary, "Institute an Economic Planning System Better Suited to China's condition," Beilina Review 25 (Oct. 11, 1982): 21. See also, Xue Muqiao, "A Study in the Planned Management of the Socialist Economy," Beijina Review 22 (Oct. 26, 1979), rewrinted in Edwards, Randle, Law in People's Chinq IIIA (Spring 1986, private printing) : 60. This article forecasts the tension which subsequently developed between enterprise developed budgets and state imposed plans (with quotas).
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• E.g.. Miao Fuchun, "The Current State of Our Country's
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• Two important new laws which affect consumer banking are analyzed infra. For a disussion of central bank law, see Xu maizhong, " Strengthen the Macroeconomic control and Regulations of Banks," Renmin Ribao (Dec. 2, 1985): 5; F.B.I.S. (Dec. 12, 1985): K7. Thus article calls on the government and people "to change the worn out concept that a bank is an organ for provision of funds, and give the central bank the right to independent regulation and control of funds, with no other department having the right to interfere." Note that herein the word "law" is used with a broad meaning, and includes such documents as state council circulars (which are soft budget type policy statements), official regulations and official procedures.
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• "People's Bank Crucial to Macroeconomics -- An Interview with Chen Muhua," newspaper article reprinted in Edwards, Randle, Briefina Materials 1 (July 1985, private printing): 70. Chen is both President of the People's Bank of China and also a State Councillor.
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• Id
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• The specialized banks are also Considered to be responsible for macroeconomic control. The People's Bank of China has been designated as the central bank. However, prior to that designation the People's Bank of China operated as a savings bank with numerous branches. Therefore the bank is in a transition period during which the bank must operate as both a central bank and a customer service bank. Reporting to the People's Bank are the so-called specialized banks, the Agricultural Bank, the Bank of Industry and Commerce, the Construction Bank, and the ,Bank of China. Other than the Bank of China which handles ;foreign exchange and foreign accounts, the other specialized banks are intended to operate as the customer service banks for domestic use. For further information on policy development which led to the current banking structure, see Byrd, W., China's Financial Svstem (1983).
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• The importance of this responsibility will be demonstrated in part III below
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• Economic Contract Law, chapter 6, article 52. It will be interesting o analyze examples of this provision when documentation appears on how it is carried out.
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• Id,., and see also the Interim Procedures for the Handling of Loans by the Bank of China to Chinese Foreign Joint Ventures (March 1981)
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• See, Dirks, Anthony, "A Legal Opinion,l8 China Trade Report (Feb. 1983) : 131 Article, "Finance Reform in Shanghai Exhibit: Expanded Investment in Economic Zone to Exceed 60 Million Yuan in a year Renmin Ribao (Overseas Edition)(Dec. 2, 1986):
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• Funds for capital expansion came from many other sources in addition to bank loans. Loans were issued by local credit cooperatives and by other business enterprises. Capital expansion was also funded to some extent by enterprises' own retained earnings. See Wang Mengkui, "Characteristics of and Ways to Deal with theKesent Expansion of Investment," Guansminq Ribao (Nov. 9, 1985): 3; F.B.I.S. (Dec. 10, 1985): K8.
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• Jia , Yan . 1985 . Probing the price reform in our country . Beijing renmin ribao , 5 November
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• The term "collectives" refers to enterprises organized
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• Regulatory functions previously monopolized by the
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• See. "Bankruptcy Law Needed for Backward Enterprises,"
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• The fact that managers in. China became accustomed to the impossibility of bankruptcy played a role in their carelessness toward the profitability of their organizations and enterprises. Prior to the new bankruptcy law, bankruptcies were possible for collectives, although still impossible for enterprises owned by the state. See Sun Yarning, "China's Enterprise Bankruptcy Law Which is Being Formulated, Hong Kong Liaowang (Jan. 27, 198.6): 10; F.B.I.S. (Feb. 13, 1986): K21.
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• The fact that managers in, China became accustomed to the impossibility of bankmptcy played a role in their carelessness toward the profitability of their organizations and enterprises. Prior to the new bankruptcy law, bankruptcies were possible for collectives, although still impossible for enterprises owned by the state. See Sun Yaming, 8fChina1s Enterprise Bankruptcy Law Which is Being Foncalated, Hona Kona Liaowanq (Jan. 27, 1986) : 10; F.B.I.S. (Feb. 13, 1986): X21.
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• Mengkui , Wang . 1985 . characteristics of and mays to deal with the present expansion of investment . guangmlng ribao , 3 November F.B.I.S (Dec. 10, 1985): k8
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• Chinese history since the Communist revolution has been characterized by a series of liberalizations followed by often brutel periods of repression of the participants, especially the intellectuals.
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• Compare Song Tingming, "A Key to Solving the Problem of Investment Expansion," Beilina Jinali Ribao (Aug. 25, 1985): 1; F.B.I.S. (Dec. 10, 1985): K8. This article also blames investment expansion on loopholes in state plans.
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• See infra part II.
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• See commentary, "Large State Enterprises Need such Administraors," Xinhua Domestic News service (Jan. 28, 1985); F.B.I.S. (Jan. 29, 1985): K22. This article describes a manager who went out of his way to pay more in taxes. Note that there are regulatory limitations to pre-tax capital construction, although these have been widely dishonored. Recently there have been experiments with officially supported risk investment in China. Ling Wancheng & Liu Gao, "Risk Investment in China, Hona Kons Liaowanq (Feb. 3, 1986) : 14: F.B.I.S. (Feb. 13, 1986): K18.
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• Wang Mengkui at Kg, see supra note 3
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• For a discussion Of the bonus issue, see, Commentary, "State Council Bans Indiscriminate BonusesItt Beijing Xinhua Domestic Service (Dec. 29, 1984); F.B.I.S. (Jan. 4, 1985): K9 . On December 28, 1984, the State Council issued a circular prohibiting the indiscriminate issuance of bonuses and allowances. Bonuses were still a problem in 1985.
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• See, Commentary, "Seriously Enforce the Accountancy Law," Belling Remain Ribao (Jan. 23, 1985): 2; F.B.I.S. (Jan. 28, 1985): K21. This article claims that "the accounting system [has been] less than sound. Figures [have not been] based on fact. Accounts [have not been] clearly presented."
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• Wang Mengkui at K9, see supra note 23.
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• Wang Mengkui concluded that "only by … strengthening macroeconomic control [by the banks] can we eliminate expansion of investment. u. at K10.
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• The various kinds of officially recognized lending institutions that are not banks include investment and trust companies 8), farming village cooperative societies municipal cooperative trust societies and any other credit organization established by permission of the People's Bank of China. See, Provisional Measures of the People's Republic of China for Bank Management, article 22 (1986see aerier ally, Ye Zhenpeng, "Local F 1 nancial Credit Should Be Established and De~eloped,'~ Beiiina Guanamina Ribao, '(Nov. 2, 1985): 3: F.B.I.S. (Nov. 18, 1985): K14. A particularly vivid description of the influence of the credit cooperatives can be seen in Huang Yougen, "Characteristics of the collective 'small Money Houses'," Zhongguo Jinrong 2 (1985): 38 In the city of Wuhan on a certain street the bank had 143 accounts with deposits of 107 thousand yuan and outstanding loans of 79 thousand yuan. One local credit society on the same street had 233 accounts with deposits of 336 thousand yuan and loans outstanding in the amount of 522 thousand yuan. The number of potential depositors in the area was calculated to be 1026. The area has three credit cooperatives which daily handled about 200 thousand yuan and drew up to 600 checks. The credit cooperatives functioned as money brokers, pooling customers' funds for group deposits in the bank or for lending out on more flexible terms than the banks were able to offer. The lending activities of the banks are limited by centrally determined lending quotas, procedures and shortages of personnel. Doing business with banks, in Wuhan at least, involved long lines, long waits for approval, a higher likelihood of denial on loan applications, and occasional inability to retrieve deposited funds when desired whether because of temporary currency shortages or due to exercise of the bank's right of setoff against payments owed to suppliers. In addition, if an enterprise wished to do something illegal such as raise salaries or use working capital for a construction project, the bank could refuse to release money regardless of whether the enterprise's account had sufficient funds to cover the withdrawal. Convenience of hours and service were one reason for the popularity of the credit cooperatives. Customers of the credit societies could transact their business during lunch breaks or before or after work. Simpler procedures resulting in faster loan approvals, with fewer levels of management involved, were another reason for the popularity of the credit cooperatives.
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• Huang Yougen, supra note 40
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• Huang Yougen, supra note 40
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• Ren Junyin, "An Overall Point of View and the Tightening
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• Id.. at K17.
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• Id.
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• Id
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• Id.. at K15.
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• There is a constant tension reflected in the materials
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• There is a constant tension reflected in the materials which follow, between the role of banks as credit institutions, and the role as regulatory arms of the state. In their regulatory capacity the banks take on duties of policing collection efforts, general management policies and the accuracy of bookkeeping entries, just to name a few of the activities which will be touched on in part I1 of this article. Unlike American banks, the banks in China are forced to act as policing agents. Contrast Bankers Trust CO. v. Litton System, 599 F.2d 488 (2d Cir. 1979) in which it was held that an American bank was not required to investigate whether commercial bribery was committed by its assignors because to do so would put the bank in the inappropriate position of policing such activity.
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• This convention is restated in the Interim Measures of the Chinese Bank of Industry and Commerce on the Supervision of Working Capital in State Owned Industrial and Commercial Enterprises [hereinafter Interim Measures]
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• This convention is restated in the Interim Measures of the Chinese Bank of Industry and Commerce on the Supervision of Working capital in State Owned Industrial and Commercial Enterprises [hereinafter Interim Measures]
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• As an accounting convention this distinction, though no longer rational, is retained because to change it would entail all the confusion and disruption necessarily involved in teaching all the bookkeepers in China to work within a new system.
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• The interest rate is set by the central authorities and is lower than other loan interest rates so as not to cause hardship to creditors and employees of the enterprise who get paid out of borrowed funds. The fear is that if it were a hardship to borrow, payments would be delayed.
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• In the case of collective enterprises, provincial or other government branches would carry out the supervisory and financial role assumed by the Finance Ministry for state run enterprises. The point to bear in mind is the: distinction between the Finance Ministry (or local government) 'controlled category of capital, and the bank controlled category of capital.
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• Allocating costs under such a system is a complicated matter. See infra note 90.
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• Such circulars have the force of law. See text accompanying sum* note 8.
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• A discussion of Chinese auditing practices is beyond the scope of this article. What little information is available cannot be adequately analyzed without access to Chinese .accounting regulations.
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• Law of the People's Republic of China on Joint Ventures Using Chinese and Foreign Investment, article 8.
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• Joint Venture Law, article 2.
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• Interim Measures, chapter 2, article 5 spells out this requirement as applicable to domestic enterprises:
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• It has been considered desirable to prevent managers from engaging in unlimited expansion of their businesses. See Jiang Shaohua, "The Power of Expanding Reproduction, Should notbe Given Wholly to the enterprise," Beiiina Guanmlncf Ribao (Nov. 23, 1985) : 3; F.B.I.S. (Dec. 10, 1985): X13.
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• The source of these observations is an unpublished field study by Xu Xiaosheng, Lecturer, Beijing College of Finance and Trade. See also, Xiong Yongnian, "An Interview with the Spokesman of the Supreme People's Court on a Further Crackdown on Economic Crimes," Beiiina Renmin Ribao (Feb. 1, 1986) : 4. Cf. Terrill, Ross, "Trying to Make China Work," The Atlantic (JUG, 1983): 20; Mosher, S., Broken Earth (1983): 84-93.
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• Threats have included blocking access to utilities, employee housing, and other necessary services.
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• The source of these observations is a 1985 interview with Wan Hong, of the Research Department of the People's Bank of China.
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• Rulings providing for subsidies and benefits have been numerous though not always successful in encouraging conscientious management. With the recent passage of a ,bankruptcy law, a new method is added to governmental efforts to control the quality of management. See suDra notes 6, 28 & 29. Bankruptcy creates the threat of putting enterprises out of business and of subjecting employees to the loss of their jobs.
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• Regulation of year end bonuses has been widely evaded, which has lead to these prohibitions as well as to other exhortative measures. See suvra note 36.
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• For example, when Company A buys goods from Company B, Company B presents shipping documents to its bank branch after delivery of the goods. B's bank branch uses the shipping documents to collect payment for B's account from A's bank branch. If A's account has insufficient funds, B's bank cannot collect payment. Company B must then take a loan from its bank branch to tide it over until payment is collected. B's bank branch still continues its efforts to collect payment, but will not be able to collect until A's account has sufficient funds. If A's bank account contains funds but not enough to pay the entire bill, A's bank branch must negotiate with Company A regarding the details of how much money may be transferred out to make payment. These negotiations must be held in accordance with numerous regulations designed to protect buying firms from making payments in a way that will leave insufficient funds for such other expenses as salaries and other ongoing expenses. If Company A challenges the propriety of the transaction, A can prevent its bank branch from deducting the purchase price from its account. Bases for controversy have proven easy to find. Although in such cases A's bank branch charges an interest penalty of 3/10,000, payable to B, the penalty does not equal the interest which B Company must pay for its loan to cover expenses until payment is collected. B Company has virtually no recourse. This problem is currently under review and legislation designed to improve collection measures will be forthcoming. (78) For further information on extra-legal dispute resolutions among enterprises, see, Herbst, Karl, "Notes on the Authority and Relations between State-Owned Enterprisesmv (Feb. 1980) in Edwards, Randle, Law in Peo~le's China IIIA (Spring 1986, private printing): 135; Archibald, Bruce, "A Comparative Look at 'Contract Law" in the PRC," (1975), u.: 118. Both of these papers were written prior to promulgation of the Chinese Economic Contract Law, and both papers examine administrative and other non-legal means of resolving contract disputes. See also Xato Masanobu, "Civil and Economic Law in the People's Republic of China, The American Journal of Com~arative Law 30 (1982) : 429, 449-451.
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• For further information on extra-legal dispute resolutions among enterprises, see, Herbst, Karl, "Notes on the Authority and Relations between State-Owned Enterprisesmv (Feb. 1980) in Edwards, Randle, Law in Peo~le's China IIIA (Spring 1986, private printing): 135; Archibald, Bruce, "A Comparative Look at 'Contract Law" in the PRC," (1975), u.: 118. Both of these papers were written prior to promulgation of the Chinese Economic Contract Law, and both papers examine administrative and other non-legal means of resolving contract disputes. See also Xato Masanobu, "Civil and Economic Law in the People's Republic of China, The American Journal of Com~arative Law 30 (1982) : 429, 449-451.
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• (Feb. 1985) [hereinafter the Provisions].
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• The economic courts are separate from the penal and civil courts. Article 3 of the Organic Law for People's Courts (July 1979) specifies that the people's courts try both criminal and civil cases. A civil procedure law was adopted only on March 8, 1982, less than one year after adoption of the Economic Contract Law on Dec. 13, 1981. The economic courts exist to assist parties in suing under the Economic Contract Law.
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• It was perhaps expected that respect for the government and its regulations would be sufficient to ensure that such regulations would be carried out and that there would therefore be no need for enforcement provisions.
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• Issues such as the regulatory authority of the banks, and their right to conduct supervision or other interference with the management policies and practices of the borrower, would not be adjudicable as issues of contract breach. Nevertheless, procedural impropriety in exercising regulatory authority in circumstances relating to the conduot of a loan contract, might be adjudicable in the economic courts.
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• It will have been easier to get legislative support for the Provisions from pro-central planning legislators on the basis of specifying that decentralized loan contract enforceability would lead to improvement in performance of the state plans. A discussion of the tensions which exist between proponents of centralism and proponents of de-centralization may be found in Weil, M., "Tightening Up," m e China Business Review (March-June 1982), gearinted in Edwards, Randle, Caw in Peoale's China IIIA (Spring 1986, private printing): 78.
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• See article 20 for sanctions on this point.
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• The procedures for such an injunction would be worked out in the economic courts. There is no distinction in China between law and equity.
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• Because almost every entkrprise must borrow the majority of its working capital, only rarely does an enterprise not have a loan contract outstanding with the bank. Therefore there will always be an existing contract whose terms would be altered, if not breached, by any new lending. It would seem that any time the lender was unwilling to extend additional sums which might be forcibly insisted on by the borrower, the lender could claim breach of an existing loan contract.
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• Since China has no common law of contracts, and has very little experience with its contract law statutes, this requirement that parties abide by their contracts is not as unnecessary as it might seem.
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• An example of a Finance Ministry ruling is the Specific Questions and Explanatory Answers to the Interim Measures on Carrying Out the Secpnd S, age of the "Txes instead of State Profits" Poiicy (Jan. 7, 1985)(issued in conjunction wit the Finance Ministry Policy circular by the same name). Rulings are promulgated as generally applicable regulations and not as responses to specific parties' requests or complaints.
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• Counsel would be of little assistance in such negotiations since the rulings and other detailed regulations are normally not made available to attorneys. The rulings are circulated to managers of organizations likely to be affected by the rulings.
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• For example, a secure source of repayment would be a depreciation account set up for repayment of a loan for renovating a piece of machinery. The account balance is increased as the depreciation of the machine in question is recognized as product cost. A corresponding entry for the cost deduction would be an entry to a special fund for repayment of the loan. (In other words, as a machine carried on the books with a coat basis of 10,000 is depreciated, say, at the rate of 50 per month, each month a corresponding entry of 50 will increase the balance of the special account for loan repayment.) The costing procedures are spelled out in very detailed Finance Ministry rulings, with numerous exceptions allowable for specific situations. Finance Ministry rulings on these questions are brought along to loan negotiations by the negotiators to support their side's arguments. An example of cost regulations is the Requirements for the Management of Cost Procedures in State Ru Industrial and pansport tion Enterprises ) (April 26, 1984). See alsp Detailed Procedures for Cost Management in State run Industrial and Foreign Trade Enterprises(Aug. 20. 1984); Cost Management Procedures fo State Run Enterprises)(March 5, 1984).
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• This analysis is derived from interviews with Xu Xiaosheng. see sutxa note 50.
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• The requirement of approval is intended to discourage the use of third party guarantors. The banks' supervisory jurisdiction over guarantors is difficult to justify, and this may be one reason why the practice is discouraged.
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• Chinese Economic Contract Law follows the civil law practice of allowing penalty damages, and stipulated penalties are specified in almost every Chinese contract.
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• The wording of this article leaves unanswered such questions as how waste or losses are determined. Although administrative and penal sanctions are available in cases of illegal activity, the bank may not be able to force prosecution. The lender's legal remedy is in contract law.
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