Strategies of Downsizing Administrative Licenses

Downsizing administrative licenses may be construed as the second stage of structural reform since the early 1980s. The first stage of reform, characterized by debureaucratization, de-nationalization, and greater use of market principles, comprises the strategies of bureaucracy downsizing, departments merging, reform of state-owned enterprises, transformation of government departments into quasi-governmental organizations, and civil service reform. The control on business opportunities was relaxed. Monopolies over foreign trade were broken up. Industrial ministries were either transformed into economic entities, industrial associations, or absorbed into other ministries. Market forces were phased in to replace bureaucracy in directing economic production and resources distribution. Bureaucracy was trimmed. Those remaining in bureaucracy were better educated, younger, and less obsessed by the Leninist ideas of economic management. State-owned enterprises were incorporated and exposed to greater competition. While the state retreated from enterprise ownership and economic planning, it set up and strengthened ministries and departments with economic and social regulatory functions, such as environment, food safety, work safety, financial services, telecommunication, and intellectual property rights. Meanwhile, it restricted administrative discretion and bureaucratic interference in private businesses through a legal framework. Administrative Litigation Law (1990), Compensation Law (1994), and Administrative Punishment Laws (1999) are examples in this legal framework.

Before the end of the 1990s, the PRC government launched several rounds of downsizing. In the 1998 administrative reform, most industrial ministries were either transformed into quasi-governmental industrial associations or downgraded and merged with other ministries. Many forms of administrative licenses disappeared together with these industrial ministries. In September 2001, the State Council set up an interdepartmental State Council Leadership Small Group on the Reform of the System of Administrative Licensing (Guowuyuan xingzheng shenpi zhidu gaige gongzuo lingdao xiaozu) to improve the coordination of downsizing. After several rounds of downsizing, the State Council gave up the authority over 1,795 licensing items. Some of these abandoned licensing items were annulled altogether whereas others were handed over to industrial associations and other intermediary agencies (Meng, 2004).

The downsizing campaign soon penetrated into many local governments (Table 4 [ PDF 100.1KB | 1 pages ]). The process of issuing licenses has been made more transparent. Jinan city displayed official documents concerning licenses in public libraries or on government websites. Guangzhou city published hongtou wenjian in Guangzhou Administrative Report and accepted subscriptions from the public. Wuhan city posted its new hongtou wenjian in the Public Bulletin of Wuhan People’s Government every two weeks. The Bulletin was distributed to the public free of charge. Chongqing city published most of its hongtou wenjian in the Administrative Affairs Bulletin since January 2002. The cities of Wuxi and Shenzhen reviewed and overhauled hongtou wenjian. By June 2002, Shenzhen had reviewed 2,500 internal documents, annulled 878 of them, and modified 1,700 (Lai, 2003: pp.171-172). The amount of license fees which used to be secretive were made open. License applicants deposited the fees directly in the bank accounts under the scrutiny of treasury bureaus so that in principle no departments could embezzle the fees. The licensing procedures were streamlined by setting up one-stop service centres. Complaint centres and telephone hotlines were set up to keep rentseeking behaviour in check (Yang, 2004: pp.154-175).

Many licensing items annulled have been re-established later on. The number of licensing items in Shenzhen city rose to 652 in 2001 after having been slashed from 1091 to 463 in 2000 (Shizhengfu, 2001: p.A1). Guangdong province slashed the number of licensing items to 1,205 in June 2000. Soon after that, it rose to 1,519 items (Guanshe, 2006). To avoid the re-establishment of annulled licensing items, the National People’s Congress (hereafter NPC, the national legislature) enacted the Administrative Licensing Law (hereafter "the Law") to institutionalize the procedures of creating licenses through restricting administrative power and increasing the transparency of licensing procedures. The drafting of the Law began in mid-1990s. It took almost five years to finish consulting various stakeholders before State Council could start drafting the Law in 2000. NPC Standing Committee reviewed the draft law in 2002 and passed it on 27 August 2003. The effective date of the Law was postponed to 1 July 2004 to allow local governments more time for aligning their license regulations with the Law (Xingzhen, 2004).

Several provisions of the Law are noteworthy: Article 12 states that only six broad market sectors require licenses for market access, though what constitutes the six broad market sectors is vaguely defined. ⁵ In parallel with PRC government partial centralization of economic authority from sub-provincial to provincial-level governments since the late 1990s, ⁶ Article 25 removes the licensing authority created by subprovincial governments. All the licensing authority of sub-provincial governments must be either based on national laws or delegated from provincial-level governments. Provincial-level governments, in turn, are restricted by Article 15: The licensing items created by provincial-level governments may be valid for one year at most. Upon expiry, an enactment from the provincial people’s congress (legislature at provincial level) is required to keep the licensing items valid. Furthermore, this Article addresses the issues of regional protectionism: It prohibits local governments from using licenses to limit market entry and import of product, services and labor. Article 13 signifies the retreat of governments from licensing, stating that government departments should not create licensing items when business activities can be effectively regulated by: 1) citizens, legal entities, and “other organs”; 2) market competition; 3) industrial associations; 4) postverification.

Several provisions are to take on rent-seeking behavior. Article 27 prohibits license-issuing departments from compelling license applicants to purchase particular products produced by the departments or their subsidiary enterprises. Article 58 allows departments to charge license fees only if: 1) the fees are stipulated in laws or administrative decrees, and; 2) the public has prior knowledge of the fees. This provision reflects the Law’s convergence with paragraph 308(a) of the Report of the Working Party, stating: “China's licensing procedures and conditions were published prior to becoming effective”. In contrast to the user charge principle widely used in industrialized countries, Article 58 requires licensing departments to cover administrative costs of issuing licenses by their budgets. This requirement is even stricter than the commitment in the Report of the Working Party paragraph 308(d) discussed above, which permits charging license fees to cover operating costs.

Transparency issues are addressed in the following provisions: Article 5 states that unless state or business secrets or privacy are involved, internal hongtou wenjian cannot be used as sources of licensing authority. Article 19 states that before introducing new licensing items, provincial-level governments should consult the public through public hearings - a means of consultation increasingly popular in PRC. Article 42 mandates departments to inform applicants of the result of their license applications in 60 days. Article 50 embraces the rule of “silence as consent”, stipulating that if departments fail to respond to license holders’ applications for renewing their licenses in thirty days, the licenses will be automatically renewed. These articles converge with the requirement in the paragraph 308(f) of the Report of Working Party about speedy decisions on license applications.

Though the Law does not contain any provisions about setting up a redress system, this does not rule out the channels for entrepreneurs to seek redress on licensing issues: Administrative Review Law confers on citizens the right of seeking redress on licensing issues. Administrative Litigation Law entitles citizens to the right of suing the departments abusing their licensing authority. Citizens have become more litigious in challenging licensing decisions after the passage of the Law. In Sichuan province, the number of court cases involving administrative licenses was 91 between January and December 2003. The figure rose to 638 during the period between 1 July 2004 (the day on which the Law came into effect) and 30 May 2005 (Gao, 2005). Within one year after the Law was effective, Guangzhou city received 9 cases of administrative review and 20 cases of administrative litigation (Lo, Qiu, and Li, 2005).

As suggested in the paragraph 308(a) of the Report of Working Party about publishing PRC's licensing procedures and conditions prior to their effective day, the State Council issued Directive No. 412 and published a list of 500 licensing items two days before the Law came into effect. No departments can issue licenses on matters beyond these 500 items, down from 4,000 items in 2002 (Meng, 2002). Most of the licensing items fall under the jurisdictions of market regulatory departments, such as General Administration of Civil Aviation, Ministry of Information Industry, China Insurance Regulatory Commission, China Securities Regulatory Commission, State Development and Reform Commission, and Ministry of Commerce (Figure 2 [ PDF 105.8KB | 1 pages ]).

The State Council has centralized most of the licensing authority. Central bureaucracies are responsible for almost 70% of these items (Figure 4 [ PDF 98.4KB | 1 pages ]). Centralization may go to the extent that the provincial and sub-provincial branches of some central organs like Securities Regulatory Commission, Insurance Regulatory Commission, Banking Regulatory Commission, Ministry of Railway, and State Environmental Protection Administration have become central organs’ executive agents and had absolutely no authority on licensing. The provincial branches of Ministry of Information Industry and Bank of China are allowed to keep only two licensing items. Less than 16% of the licensing items have been assigned to sub-provincial governments. This centralization policy is conducive to standardizing commercial practices, implementing trade-related policies uniformly across the country, and tackling the problems of inconsistent regulations. To reinforce downsizing measures, State Council promulgated “Several Opinions on Supporting and Directing the Development of Non- State Sector Such As Private Sector” in February 2005. This decree covers a wide range of policies, such as bank credit, market access, and corporate governance, and license charges. It aims to restrict local governments’ authorities in entrenching regional protectionism and collecting exorbitant fees through licensing systems. Article 1 rules out restrictions on non-state sector in all market sectors except those stipulated by law. Article 33 prohibited local governments from charging private enterprises fees illegally. All the fees must be based on national laws, State Council decrees, and regulations of Ministry of Finance and price control bureaus.⁷

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