Of Law and the Dragon: The Legal System and Business Environment in Contemporary China

By Glênio Sabbad Guedes, lawyer in Brazil

1. Between Order and Innovation

China today represents one of the most intricate legal and economic architectures in the modern world: a centralized state that merges political control with commercial openness, socialist planning with global competition. Law, in this context, is not merely a regulatory instrument—it is an instrument of strategic governance, shaping the equilibrium between stability, prosperity, and authority.

The People’s Republic of China preserves a unitary model of power. The National People’s Congress and the State Council concentrate legislative and regulatory authority. Yet within this centralism thrives a network of normative laboratories—special economic zones, free trade ports, and fiscal experiments—that form the Chinese model of law and development.

2. Socialist Rule of Law with Chinese Characteristics

Since the constitutional reform of 2018, China’s doctrine has emphasized the notion of “socialist rule of law with Chinese characteristics.” The formula embodies a fundamental premise: law is not autonomous from the Party, but the codification of its political will. The Supreme People’s Court functions as a guardian of stability, economic growth, and social harmony.

For foreign investors, China offers a system that is economically predictable yet politically sensitive. The Company Law (2023 revision) simplified corporate registration and governance, while the Foreign Investment Law (2019) replaced the old tripartite structure (EJV, CJV, WFOE) with a unified regime guaranteeing national treatment and protection from uncompensated expropriation.

Still, investors soon discover that Chinese law is both a map and a maze—precise in its incentives, flexible in its boundaries.

3. The Business Ecosystem: Zones, Ownership, and Control

China’s economic strength lies in the structure of its Special Economic Zones (SEZs), from Shenzhen to the modern Hainan Free Trade Port. Within these areas, preferential taxation, land-use rights, and full repatriation of profits are guaranteed.

The principal corporate forms include:

• Wholly Foreign-Owned Enterprise (WFOE) – full foreign ownership;

• Joint Venture (Equity or Cooperative) – partnership with a Chinese entity;

• Representative Office – limited to promotion and research;

• Foreign-Invested Partnership (FIP) – flexible contractual form subject to local approval.

Registration has been digitalized and unified across most provinces, though the Negative List still restricts access to sensitive sectors such as media, education, and data.

4. Taxation and Economic Governance

China’s tax system, once fragmented, is now structured and coherent:

• Corporate Income Tax (CIT): 25%, reduced to 15% for high-technology enterprises and substantial activities based in the Hainan Free Trade Port, with this incentive extended until 2027;

• Value-Added Tax (VAT): 13%, 9%, and 6%, with 0% for exports, under the new VAT Law coming into force on January 1, 2026;

• Individual Income Tax: progressive, up to 45%;

• Import Duties: reduced under trade frameworks such as the RCEP.

Taxation in China serves as a tool of industrial policy, not a mere fiscal mechanism. Incentives favor innovation, clean energy, and artificial intelligence, while speculative capital flows are tightly monitored. In moral terms, taxation reflects solidarity with the collective good, not a transactional burden.

5. Free Trade Zones and Legal Experimentation

China’s Pilot Free Trade Zones (FTZs), beginning with Shanghai in 2013, constitute the legal backbone of its economic liberalization. Within them, firms operate under liberalized foreign exchange regimes, streamlined customs, and modern arbitration frameworks, often in collaboration with the China International Economic and Trade Arbitration Commission (CIETAC).

The Hainan Free Trade Port, conceived as a hub for logistics and tourism, exempts most imports from tariffs and applies reduced income tax rates to strategic industries. In these jurisdictions, law is viewed as a process of gradual experimentation, not sudden revolution: the State observes, adjusts, and replicates what works.

6. Digital Governance and Intellectual Property

China’s technological rise—from DeepSeek’s AI advances to TikTok’s global influence—has redefined the relationship between property, privacy, and sovereignty. The Data Security Law (2021) and the Personal Information Protection Law (2021) create a dual framework balancing innovation and state control.

For corporations, this entails data localization requirements, mandatory cybersecurity reviews, and compliance oversight in critical sectors. Paradoxically, China has become a world leader in intellectual property protection, with specialized courts in Beijing, Shanghai, and Guangzhou, and over 1.8 million invention patent applications filed in 2024, according to the CNIPA.

In this sense, Chinese law seeks coherence rather than liberty—each rule justified by the broader ideal of technological sovereignty.

7. Political Control and Economic Confidence

The reinforcement of political supervision—travel restrictions for officials, scrutiny of foreign NGOs, and the “social credit” system—reveals the constant tension between openness and discipline. The legitimacy of the State rests upon its promise of prosperity, and legal certainty is its chosen instrument of trust.

Disputes are typically resolved through mediation, arbitration, or administrative negotiation, rather than litigation. Trust in China is institutional, not personal—faith in the continuity of rational governance.

8. Law as a Mirror of Civilization

China’s legal experience challenges the Western conception of legality itself. While Western law strives for autonomy, Chinese law seeks harmony. It inherits the Confucian maxim: order precedes freedom.

In this worldview, governing by virtue and policy replaces the adversarial model of rights. Yet a creative, globally integrated private sector continues to flourish, proving that centralization and innovation can coexist.

Ultimately, Chinese law, like Dworkin’s philosophy, is an interpretive practice—a narrative between what is and what ought to be. The difference is that, in Beijing, the interpreter is not the judge, but the State itself.

Keywords: Chinese law, foreign investment, free trade zones, taxation, governance, development, Dworkin.