Since its accession to the WTO twenty years ago, China’s image has shifted from a good student aspiring to assimilate itself into the multilateral trading system to one that is increasingly alienated from key WTO principles. How has China’s perspective on WTO been evolving? What are the reasons behind China’s changing perspective? This chapter addresses these questions from the Chinese perspective with a comprehensive analysis of the key moments in China’s first two decades in the WTO, followed by practical suggestions on how to engage China more constructively in the WTO and beyond.

Part III applies the suggested analytical framework at the micro level by delving deep into China’s corporate and capital market development puzzle. It uses the explanatory power of law and political economy to bring more clarity to China’s evolving approach to corporate governance. The purpose is to better understand the role played by formal law in governing Chinese public firms and ultimately in China’s capital market growth and to unpack the political–economic determinants that drove its evolution. The chapters in this part of the book pay particular attention to the creation and efficacy of corporate governance institutions, both traditional and idiosyncratic, that operate in the Chinese market.

This part of the book finds that law and political economy dynamics have produced operational results. They have mobilized market participants (both economic and political) to design and deploy various growth-promoting mechanisms within firms and in the market at large. The analysis shows how such mechanisms at times triggered, supported, boosted, or replaced more conventional corporate governance institutions in ways that eventually marched the market forward.

Chapter 4 examines legal configurations of political power dynamics during the Legal Modernization Era (ca. 1992–2010) – a golden age for legal reformers in China. The chapter reviews the development of significant national-level economic laws and regulations that gradually replaced many of the fragmented and probationary rules used earlier. The analysis of legal and policy documents suggests that the use of law in this period was consciously directed in two main directions: the use of law to structure and support the creation of markets (i.e., the economic function) and the use of law to reconfigure governance capacities and boost more centralized market regularity within the Party-state system (i.e., the political function). These two functions of law also set the foundation for what is known today as China’s state capitalism and its dominance in the domestic and international markets.

Scholars have long regarded certain attributes of corporate governance, particularly legal institutions that protect investors, as engines for financial development, capital market expansion, and growth. Yet, the development of China’s market challenges many of the underlying assumptions in those theories and leaves its observers puzzled. Consequently, many have dismissed the role of law in China’s economic development. But they have neglected to consider the political functions of law and how they have bolstered the development of the Chinese market. Part I delineates the conceptual and analytical frameworks underpinning the book. Chapter 1 unpacks the traditional framework that shapes how scholars and policymakers think of corporate governance and its role in financial development and market growth. Chapter 2 offers law and political economy as an alternative analytical framework through which to address the puzzle and the role of law within it.

The chapter examines the corporate governance institutions that developed during the Legal Modernization Era. It analyzes the traditional corporate governance mechanisms, both internal and external to the firm, that were embraced in China and adapted to domestic political–economic circumstances. The chapter discusses how China’s superficially convergent, investor-oriented corporate governance framework actually diverged in practice. It illuminates the political functions of law, showing how the corporate governance framework was ultimately directed to support the reconsolidation of political–economic powers and the shift toward state capitalism. The chapter offers comparative insights drawn from alternative systems of corporate governance and analyzes the implications of the Chinese framework for investors in the Chinese market.

Chapter 3 deflates the myth that China’s state capitalism is a new problem with an extensive review of China’s WTO accession. Drawing from the negotiation records, we demonstrated that WTO Members have been well aware of the potential clashes between WTO rules and China’s state capitalism since the very beginning. Yet, contrary to those who argue that state capitalism is inherently incompatible with the WTO, the Members believed that practical solutions could be found. Thus, they meticulously identified specific aspects of the Chinese system that might undermine its WTO commitments and carefully crafted surgical solutions to address these problems in WTO-consistent ways. Such an approach is much better than the one asking for a complete overhaul of China’s economic system, as it not only minimises the resistance of China but also ensures that the problematic areas are fully addressed. Thus, the theory that the accession negotiation failed to address the problems presented by China’s state capitalism is unconvincing. Instead, the practical approach adopted in the negotiation demonstrates the faith among WTO Members in the ability of the WTO to act as a neutral forum.

Chapter 1 introduces the main theme of the book, that is, challenging the conventional wisdom that the existing WTO rules are inadequate to address China’s state capitalism and demonstrating that China’s WTO-plus obligations, coupled with the general rules on subsidies, do provide ways to address the problem. It also provides summaries of the chapters to explain the structure of the arguments in the book.

Chapter 2 traces the contours of China’s SOE reform since 1978. We divided the reform into five phases, where the first two phases focused on ensuring the survival of SOEs by granting them operational autonomies, first at the firm level and then at the managerial level. The third phase saw the adoption of corporatisation strategies for the ones deemed promising and privatisation of the ones deemed unviable. The fourth phase covered the first decade after China’s accession to the WTO, where the earlier trajectories continued, as we can see in the efforts to continue the market-oriented reform for SOEs with plans of commercialisation and modernisation. At the same time, a worrying trend also started to emerge when the government launched various campaigns to create national champions. This trend continued in the fifth phase as we entered the new era of ’Socialism with Chinese Characteristics’, where SOEs, strengthened by the previous rounds of reforms, started to squeeze out private firms in various forms. At the same time, the CPC also stepped up its efforts to enhance its influence in the SOEs by launching aggressive drives to build Party cells in these entities.

Chapter 7 is dedicated to a more focused discussion of how to tackle China’s state capitalism in the WTO. The first option is utilising existing WTO rules, especially those China-specific provisions, to bring cases against China, which so far has not happened. This is partly due to the perception that WTO litigation does not work against China, an argument which we refute by referring to China’s good compliance record with WTO decisions. At the same time, we do agree that a more strategic approach should be taken in bringing such cases and proceed to suggest the types of cases that should be brought and how the evidentiary burden could be met. The second option is through trade negotiations. While bilateral negotiations such as the US–China Phase One deal do not really work, there is great potential in multilateral negotiations. Here, we caution against those advocating the exclusion of China in such rule-making efforts and argue that China should be engaged to make the negotiation fruitful. To make the discussions more productive, we also suggest certain guidelines to make sure that China will be more constructively engaged.

Chapter Three addresses Hong Kong’s economic function for China after 1997. Beijing’s challenge has been to perpetuate Hong Kong’s role as China’s offshore financial and trading center after the sovereignty handover. After 1997, the US-HK Policy Act allowed the US and the international community to continue treating Hong Kong as an independent trading entity separate from mainland China. Hong Kong maintained its separate membership in international organizations like the WTO, even after China joined those organizations. This continuous special status, conditional upon Hong Kong’s autonomy from Beijing under the One Country, Two Systems, made Hong Kong a conduit and stepping stone for Chinese capital and the elite who sought access to global capital or relocation to other parts of the world. It is also a key to Beijing’s plan to internationalize the Chinese currency Renminbi (RMB) without making RMB fully convertible in mainland China. Hong Kong’s unique offshore financial role for China led to increasing Chinese capital domination in Hong Kong.