From Legal Capital to Subscribed Capital : Capital Rules in China and its Economic Background

Since the first corporate law in China was passed in 1993（the 1993 Corporate Law), China took a rather strict approach on enforcing capital maintenance requirement, especially through a requirement of a statutory minimal registered capital. Such an approach survived in the substantial revision of corporate law, taking effect in the year of 2005 (the 2005 Corporate Law). In 2013, such a requirement was abandoned rather dramatically with the issuance of a set of regulatory rules by the State Administration of Industry and Commerce (the company registrar) and subsequently confirmed in a set of amendments to the corporate law (the 2013 Corporate Law). The reactions to such a rather sudden change diverged. Some praised this change a revolution which would liberate the market and unleash the power of investment. Others, however, expressed reservations and deep concerns, especially with respect to the protection of creditors of small-to-medium-sized companies without track-record in the market. The evolution of the capital maintenance requirement in China fits well with the general trend and patterns in other jurisdictions: moving from a stringent legal capital regime towards a more liberalized and flexible capital regime, such as France, Germany, Japan and Korea. Meanwhile, this process presented certain features unique to China, which is the focus of this Chapter. In particular, the evolution has closely tracked the economic reform in China of a centrally planned economy to a more market-oriented economy. Meanwhile, the capital maintenance rule in China is still a work-in-progress in terms of achieving the goal of protecting creditors' interest with a liberalized subscribed capital regime, leaving critical gaps and challenges.The rest of the Chapter is organized as follows. Section I provides a brief overview of China's economic reform for the past four decades and its impact on corporate law in general, and the evolution capital maintenance rule in particular. Section II provided an overview of the legal capital regime under the 1993 Corporate Law and 2005 Corporate Law. Section III sets out the various costs of the legal capital regime. Section IV introduced the new capital rule regime created under the 2013 Corporate Law, especially the subscribed capital regime. Section V sets out a few challenges embedded in this new regime. A brief conclusion follows in the end