2.1.3 Historical background of PRC company law

After the New China was established in 1949, the Chinese government abolished all the existing laws introduced by the previous government.1 In 1950, the "Provisional Regulation for Private[ly] Owned Enterprises" laid down rules for three kinds of enterprises: sole proprietorship, partnership, and company.2 Later, however, under the requirement of the central planned economy, state owned enterprises (SOEs) took a dominant position in the economy. Privately owned enterprises were stifled. The SOEs in that period were not companies in that they did not have independent assets or management rights of their own. Government, as the owner of SOEs, enjoyed the ownership of assets and operated SOEs according to its own policy. Accordingly, at that time, enterprises were distinguished by the ownership of their assets rather than by their legal features. As a result, the business vehicles in China for a long time were: Enterprises Owned by the Whole People, Collectively Owned Enter-prises, Private Owned Enterprises and Foreign investment Enterprises.3

After the opening-up, China was determined to establish a socialistic market economy, which requires equal status among different business entities regardless of whether they are state-owned or privately owned. Not difficult to imagine, the Chinese enterprise classification and the prestigious status of the SOEs became problematic.4 To solve this problem, Chinese scholars and legislature looked to the practice in developed countries for reference and concluded that it was desirable to regulate enterprises according to their legal attributes. Both SOEs and privately owned enterprises could be transformed into companies and as a consequence, differential treatment of state owned and privately owned enterprises resulting from the previous classification was terminated as well.5 Consequently, studies of companies were revived and developed again, and the first PRC company law was promulgated in 1993.

Besides the need to detach the SOEs from the government, the need for a company law in the early 1990s was pressing for another reason. In the 1990s, with the open door policy, there was an unprecedented frenzy throughout China to set up "companies". Various forms of "companies" sprang up like mushrooms. But few businessmen understood what a company was for and there was no company law in China at that time. People used their imagination fully, not only in structuring a company but also in how to run a company. In December 1993, onder the pressing need for regulation, China promulgated its first company law and this company law remained effective till January 2006.

Notwithstanding many problems and criticisms, the Company Law 1993 marks the first efforts in P.R. China to explore corporate issues, and has greatly improved people's understanding in this area. People have accumulated knowledge and experiences of corporate practice, which has contributed to the enactment of the new company law in 2005. Furthermore, Company Law 1993 also helped to change and update the categorization of enterprises in China by giving SOEs a chance to be converted into companies.