Compensation for Legal Transition and China’s Hierarchical Protection of Private Enterprises

Chinese law provides compensation to enterprises when their financial interests are affected by legal transitions. While statutes broadly guarantee this compensation, court decisions on such matters vary from case to case. Empirical evidence suggests that courts generally offer stronger protection to enterprises in the manufacturing and real estate sectors than to those in the coal mining industry. This chapter applies the theory of regulatory costs to explain these varying levels of protection across different sectors. It argues that in sectors where the boundaries between public power and private property are more difficult to define, regulatory costs tend to be higher, leading to weaker legal protection. Consequently, the protection offered to private enterprises is hierarchical rather than equal – it is stronger in some sectors than in others, depending on the need for intense regulation and frequent policy adjustments. Under China’s legal system, the regulatory costs are likely to be borne by private investors in the regulated sectors, which discourages private investment and amplifies the role of state-owned enterprises.