Cecca newsletter issue10

Issue Ten May 2018
CECCA NEWSLETTER cecca.org.uk 1
CONTENTS
1.Special Observer
1.1 Digital opportunities in shipping………………….……...…….2
1.2 China’s seaborne trade: a spectacular upwards trend…...4
2. Company Law
Venture capital investment trusts in china legal framework,
challenges and reform (II)……………………………………………..13
3. Transport Law
3.1 The Rotterdam Rules effect on Chinese cargo owners (I)
…………………………………………………………………………………..27
3.2 Robberies and thefts’ role in excluding carriers’ liability
and in breaking the limitation of liability: The Italian
approach…………………………………………………………………..…38
4. Data Protection Law
Legal Updates: an introduction to Regulation (EU)
2016/679 on Data Protection…………………………………….....42
5. News in Brief
5.1 China aims to establish a Pilot Free Trade Port system
in Hainan. ……………………………………………………..…………..46
5.2 China will liberalize the restriction on foreign shares
ratio in the shipbuilding industry. ………………………………..46
5.3 The Ministry of Transport of China released a ‘National
Major Oil Spill Emergency Preparedness Plan’……………….46
5.4 Shanghai Maritime Court found the Sapphire Princess
liable for an 8-year-old’s personal injury resulting from a
drowning accident on-board and lost the right to limit
liability under Article13 of the Athens Convention…………46
6. Event
6.1 CECCA “Commercial and Maritime Talk Series” started
from March 2018. All welcome to join us! ……………………..47
6.2 2018 London summit on commercial dispute resolution
in China…..………………………………......................................…48
6.3 Calling for Papers: The 9th
International Conference of
Maritime law (Shanghai) …..………………………………………...49
CECCA
China-Europe Commercial
Collaboration Association
Professional Consultancy on Legal,
Trade, Finance and Policy Matters.
London, United Kingdom
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CECCA NEWSLETTER
Publisher: CECCA Editorial Department Publishing Directors: Dr. Lijun Zhao, Shengnan Jia
Executive Editor(s): Haiyang Yu
Assistant: Desislava Koleva; Intern: Marianna Xifara

Issue Ten May 2018
1. Special Observer
1.1 Digital opportunities in shipping
Authored by Richard Scott1
Progressively greater emphasis on, and interest in, digital technology is a prominent feature of today’s
shipping industry. It is argued by some observers that digitalisation will determine the future of
shipping. Even if that argument appears somewhat controversial, there is little doubt that the
digitalisation process is certain to play a much bigger part in shipping’s evolution over the years ahead.
A valuable contribution to the ongoing debate appeared in
March this year in a research study entitled ‘Shipping in an
era of digital transformation’. The report2
is published by
Germany’s Berenberg private bank, and jointly authored
by Berenberg and the Hamburg Institute of International
Economics, affiliated with the University of Hamburg.
An aim of the research was to analyse and evaluate what
was identified as huge opportunities for shipping in the
closer connectivity of ships and ports. The beneficial future economic outcome probably will be
“optimised logistics chains, shorter waiting times, faster routes and more transparent information or
even energy-efficient fuels”. There is great potential for organising markets more efficiently. By
contrast, according to the report, the economic benefits of unmanned shipping are likely to be limited.
The research provides a thought-provoking discussion of how various elements could result in
transformed shipping activities. It is suggested that “the new technological possibilities to process Big
Data and connect them intelligently using algorithms is resulting in various digital innovations”. Such
innovations, from an economic perspective, are listed as digital platforms, virtual and augmented
reality, artificial intelligence, internet of things, blockchain, and 3D (additive layer) printing methods.
Both direct and indirect effects of these innovations are expected to have a large impact on shipping.
Some conclusions of the research may be viewed as contentious. Nevertheless, signs of the direction
1
Richard Scott MA MCIT FICS, Senior Consultant, CECCA; Associate, China Maritime Centre,
Southampton Solent University.
This article was first published in SOLENT Global Maritime Weekly Digest, 10 April 2018.
2
Report available for download free of charge at:
https://www.berenberg.de/files/MacroNews2018/180327_Berenberg_HWWI_Study-Shipping.pdf)
Editor’s Note
Digitalization reflects a new tendency in today’s global trade. The International Maritime Organization has
debated the impact of digitalization during a recent event for its 70th
anniversary at IMO Headquarter. This
article will provide you with further insights on the matter of digitalization.

Issue Ten May 2018
in which technological developments affecting the global shipping industry are heading are
abundantly clear to many people. There is perhaps less consensus about how far these trends will go,
at what speed and how transformative as well as beneficial progress will prove.
This new report specifically says that it is not offering a forecast of the shipping market. Yet it does
make bold assertions of a highly speculative nature about how the future will unfold. It serves to
robustly support the idea that digital technologies will fulfil a vastly expanded role in the longer term.
One striking observation is that “the many different innovations will interact and trigger a complex
change process, the depth, breadth and speed of which is scarcely imaginable today”. Assuming this is
intended to be interpreted in a positive way, it may be seen as potentially an exaggeration.
Many people would agree about the direction in which the trend is moving, and acknowledge that it is
likely to be strong and have huge consequences. But great uncertainty surrounds how some aspects
will evolve and interact over a period stretching out over the next one or two decades. Therefore it
seems realistic to consider a possibility of such progress being less than, or taking longer than, some of
the more audacious predictions contained in the report are implying.

Issue Ten May 2018
1. Special Observer
1.2 China’s seaborne trade: a spectacular upwards trend
Authored by Richard Scott3
Brisk growth in China’s enormous seaborne trade has resumed over the past couple of years, following
an earlier sharp slowing of the upwards trend. Potential for further expansion ahead is still visible, but
it is not easy to foresee precisely how some aspects will evolve. Adding to the mix a trade dispute with
adverse implications magnifies uncertainty about prospects.
The evolution of this global seaborne trade component is particularly fascinating, given its extra-large
size and its substantial contribution to overall trade expansion. China’s imports have grown to
comprise more than one-fifth of the world total. During the past decade, half of the rise in global
cargo volumes moved was contributed by additional import volumes into China.
Shipping story of the century
Although identification of the most significant twenty-first century shipping story is to some extent a
matter of opinion, the impact of China’s
expanding seaborne trade is in strong contention
for the title. The ramifications for both the
demand and, in turn, supply sides of the world
shipping market have been massive.
Rising imports into China were a powerful
contributor to the pre-2008 period of strong
global shipping markets. The extended dry bulk
freight market ‘boom of two lifetimes’4
ending
in 2008 reflected this influence. Subsequently, during the past decade since that strong market phase,
imports into China have provided valuable support for the bulk carrier, tanker, container ship and gas
carrier markets. Arguably that support encouraged shipowners’ collective over-estimation of seaborne
trade growth potential in the past ten years, resulting in excessive world fleet growth, severe over-
capacity and subdued freight markets for most of the period.
A few statistics emphasise these observations. The main focus of attention is on the imports picture,
as it is in this category where the biggest impact has been seen. Among exporters, China is also a
sizeable element which has grown during the past decade and over a longer period, but this
enlargement was relatively small.
A version of this article was published by Hellenic Shipping News Worldwide, 26 April 2018,
https://www.hellenicshippingnews.com/chinas-seaborne-trade-a-spectacular-upwards-trend/
1
A leading shipbroker’s description of the 2003 to 2008 unusually (for the global dry bulk freight
market) long boom of almost 5 years.

Issue Ten May 2018
The upwards trend in imports has been remarkable. In 2017, seaborne imports of all types of cargo
into China (dry bulk commodities, oil, gas, containerised shipments and other cargoes) grew by 182
million tonnes or 8 percent from the previous year according to Clarksons Research calculations. This
increase followed a 7 percent rise in 2016.5
Annual growth rates in the past ten years varied between 1 percent in 2015 (the slowest) and 37 percent
in 2009 (the fastest). The 2009 upsurge was an exceptional year, resulting from vigorous expansion of
the Chinese economy and industry which greatly assisted the world’s recovery from depression. Apart
from that unusual performance, the highest growth rates in China’s imports of all cargo types were in
2011 to 2013, when 11-12 percent annual rises were seen. Average annual growth in the entire 2007 to
2017 period was 10.2 percent.
Bumper imports, solid exports
Looking in more detail at the expansion over the past decade reinforces an impression of a truly
remarkable upwards trend. Annual imports of all seaborne cargoes into China rose by 163 percent from
the 2007 volume, reaching 2437mt in 2017. Dry bulk commodity imports, the largest element, was the
fastest growing category over the ten years, expanding by 191 percent to 1730mt. The second largest
component, oil (crude plus products), saw a 129 percent increase to 416mt. In the containerised goods
segment, growth was 43 percent to 117mt. All other cargo together increased by 149 percent to 175mt.
Relating the expansion of China’s overall imports to the performance of world seaborne trade as a
whole is revealing. Annual imports of all types of cargo into China grew by 1510mt in the ten years
ending 2017, equivalent to 49 percent of world imports growth, based on Clarksons Research data.
Annual imports into all other countries together grew by 1593mt, or 51 percent of world imports
growth. So it can be seen that China contributed almost as much to the enlargement of global trade as
other countries together during that period.6
Consequently, China’s imports (all cargo types) rose as a percentage of global seaborne trade. From 11
percent of the world total in 2007 (and, earlier, 5-6 percent in the early 2000s), the proportion almost
doubled to a 21 percent share in 2017.7
Comparing exports with imports, export volumes are less than one quarter of the imports totals.
Growth in China’s annual seaborne exports of all cargoes was a modest 19 percent during the past ten
years. The total reached 563mt in 2017. There was a 3 percent decline last year after a couple of modest
rises.8
The largest category is dry bulk cargoes, comprising two-fifths, while container cargoes are
almost as large.
2
Clarksons Research (2018), China Intelligence Monthly (London: Clarksons Research), February and
earlier editions6
Calculations by Richard Scott, using Clarksons Research data from various publications
7
Calculations by Richard Scott
5
earlier editions

Issue Ten May 2018
This brief statistical tour demonstrates the role of China, with an enlarged share of global seaborne
trade. Coupled with providing one-half of the increased global trade volume during the past decade,
the attention which the trend attracts in shipping markets is justified.
Powerful macro-economic drivers
Several general, and some more specific, influences have been instrumental in buoying up the vigorous
China trade trend. Assisting this pattern was the all-pervading influence of the national economy’s
robust progress, and the features of that sustained performance.
While showing a decelerating trend over the past decade, China’s economy nevertheless avoided any
extended severely weak periods and momentum was mostly well-supported.9
There were phases where
anxiety (especially among external observers) about prospects was heightened by signs of negative
influences becoming more prominent. Firmer conditions were restored, usually with assistance from
government stimulus programmes and, based on the official GDP figures, any deterioration was
contained.
Double-digit annual percentage rises in GDP ended, with one exception, before the global financial
crisis and recession. But even at the nadir of that crisis in 2008 and 2009, China was able to achieve
healthy 9.6 percent and 9.2 percent annual growth respectively, albeit a sharp slowdown from 14.2
percent in 2007. The exception to the subsequent pattern of below ten percent rates was a brief
revival to 10.6 percent in 2010 when the world was recovering.10
Thereafter a slackening trend became entrenched. After a still robust 9.5 percent in 2011, slower
growth became the norm. From 2012 to 2014 an annual average 7.7 percent was recorded, followed by a
6.8 percent average from 2015 to 2017.11 Other economic activity indicators in China were broadly
consistent with this evolving pattern. Despite doubts among external economists about how
accurately reported Chinese official GDP figures reflect the true picture of economic activity
unfolding, it has been clear that many large components have continued growing strongly, with
variations.
Modifying aspects
What other, more direct, influences have contributed to China’s seaborne trade trend? Mostly these
influences have been positive. Growing imports reflected vigorous consumption trends as expanding
demand for the products of individual industries spurred rising output volumes. When domestic
production of the raw materials – such as iron ore, coal, crude oil and gas – proved increasingly
inadequate, imports were needed on an enlarging scale. Foreign supplies were often more competitive
than domestic supplies, resulting from superior quality or lower cost, or both.
6
OECD (2015), OECD Economic Surveys – China (Paris: OECD), 8, commented that “following three
decades of extraordinary economic development, China is shifting to a lower but still rapid and likely
more sustainable growth path – the ‘New Normal’. It is projected to continue to catch up with the
most advanced economies, albeit more gradually...”
10
IMF (2018), World Economic Outlook (New York: IMF), April, 244, and previous editions
11
IMF (2018), World Economic Outlook, 244

Issue Ten May 2018
In several trades also a need to accumulate inventories reinforced the prevailing upwards trend. Some
stockbuilding seems to have mainly arisen because of the commercial imperative to ensure that
supplies could be maintained if any temporary trade disruption occurred. Accompanying this reason,
the government’s policy of building large strategic stocks further boosted imports. Constructing
extensive crude oil storage capacity has been an especially notable feature, and progressively filling
these facilities had a big impact.12
Another aspect of government action is energy policy. The effects on fuel imports have been mixed.
China has been moving steadily towards cleaner energy sources in recent years, attempting to reduce
reliance on coal-burning, with negative implications for imports. While coal remains the largest energy
provider,13
the alternatives of natural gas, together with renewable wind and solar power are now
promoted heavily, and hydro-power and nuclear power also are favoured. Intensifying pressure to
reduce excessively severe air pollution in cities and towns justified these policy aims.14
Government policy in the agriculture sector has caused some significant effects. Limited support for
domestic soybeans production resulted in an enhanced role for imports, the largest individual
agricultural commodity volume imported by China. Raising official strategic soya stocks provided an
additional boost.15
By contrast, government policy during the past couple of years of reducing excessive
corn stocks has been reflected in restrained grains imports for livestock feed.16
Evolving individual trades
When individual categories of China’s seaborne trade are examined more closely, several features
emerge. Within the imports trades group, dry bulk commodities are the dominant element,
comprising 71 percent of the overall total in 2017. Of the remainder, oil is the second largest with 17
percent, followed by container volumes at 5 percent and other cargoes 7 percent. Within the exports
trades group, major items include containerised manufactured goods, dry bulk commodities of which
steel products comprise the largest portion, and processed oil products.17
At the forefront of trade expansion, dry bulk commodity imports have been the star performer,
contributing dramatic growth during the past decade. In particular iron ore has become, by far, the
biggest single component, and now comprises over two-fifths of China’s entire imports of all types
12
Gibson Shipbrokers (2017), ‘China takes top spot’, Weekly Tanker Report, 18 August
10
Reuters (2018), ‘China’s 2017 coal consumption rose after three-year decline, clean energy proportion
up’, Hellenic Shipping News, 5 March: “as a portion of total energy consumption, coal usage fell...to 60.4
percent last year”.11
Simpson Spence Young (2018), ‘Coal: drivers of China’s import demand’, Monthly Shipping
Review, January, 612
US Dept of Agriculture (2017), China Oilseeds and Products Update (Washington DC: USDA), 28
October 4
13
International Grains Council (2017), ‘Maize: China inventories’, Grain Market Report, 28
September, 917
Calculations based on Clarksons Research (2018), China Intelligence Monthly, February

Issue Ten May 2018
Figure: Discharging iron ore in Dalian, China
based on last year’s volume. Within the dry bulk group total, iron ore comprises three-fifths. Other
prominent dry bulks are coal, grain and oilseeds (especially soyabeans), bauxite and alumina, nickel and
other ores, and forest products.
Iron ore imports in the past two years have exceeded one
billion tonnes annually, the seaborne total reaching 1.06bn
in 2017, an almost threefold rise in the annual volume
during the past decade. This upwards trend reflected rising
steel production and growth in ore usage, amid
strengthening demand for steel from construction
activities and manufacturing industries. Annual crude steel
production in China rose by 70 percent in the past ten
years, to 832mt in 2017.18
An evolving preference for high-
quality ore from foreign suppliers, progressively displacing
lower-quality domestic iron ore supplies, further boosted
imports.
Rapid growth in coal imports was seen over the five years ending in 2013, since when annual totals
have been lower than the peak. In 2016 and 2017, volumes of about 227-230mt annually were more than
five times levels seen a decade earlier. Steam coal for power stations is the biggest market. Overseas
supplies were often more competitive than output from China’s domestic mines, which produce coal
on a vast scale.19
Changes in consumption patterns, stocks, and government policies also had an impact
on imports. Measures taken to reduce coal usage for environmental reasons have been a significant
restraint recently.20
Within the grain and oilseeds category, the largest part is soybeans, which have been on a strongly
rising trend. Seaborne grains and soybeans imports reached 116mt in 2017, more than threefold growth
compared with the volume ten years earlier. Expanding soyameal consumption by livestock feed
producers, and soyaoil use in food manufacturing, was mostly facilitated by importing beans for
crushing, because Chinese domestic beans harvests are relatively small.21
Over ninety percent of China’s seaborne oil imports totalling 416mt last year consisted of crude oil,
amounting to 386mt. The overall total was more than double the volume received a decade earlier but
growth was concentrated in the crude portion. By contrast, oil products imports declined, amid
18
World Steel Association (2017 and 2018), Steel Statistical Yearbook 2017 (Brussels: World Steel
Association), December 2017, 2; World Crude Steel Production - Summary, 24 January 2018. Recent years’
totals are ‘not necessarily comparable with earlier data’. However, the percentage change over ten years
seems broadly a valid indication
16
Reuters (2018), ‘China coal imports tumble on new rules, India yet to take up the slack’, Hellenic
Shipping News, 24 April: “China’s decision to impose fresh restrictions on imports of coal at some
ports...it’s believed...part of efforts to boost domestic thermal coal prices and production”.
17
Scott, Richard (2018), ‘Asia’s coal trade inspires cautious optimism’, Dry Cargo International,
April18
Scott, Richard (2018), ‘China’s growth boosts trade in dry bulks’, Dry Cargo International, March, 4

Issue Ten May 2018
expanding refinery capacity which also enabled higher products shipments to export markets.22
Vigorously growing consumption by road vehicles and in the petrochemical industry, coupled with
limited domestic oil output growth, propelled the imports trend.
Although containerised exports from China are the most highly visible part of world trade,
containerised imports also are voluminous. Defined in Clarksons Research statistics as
‘containerisable’ cargoes, seaborne imports last year were about half the level of container exports
which totalled 234mt. While annual imports grew by 43 percent in the past decade, exports grew
similarly by 45 percent. 23
This extensive trade is mainly comprised of manufactured or semi-
manufactured items of many types and varieties, reflecting China’s role as one of the top
manufacturing countries.
Another notable trade contributor is liquefied natural gas (LNG) imports. These rose to 38mt in 2017,
from 3mt ten years earlier, a rapid ascent including a more than doubling over the past four years as
greater emphasis was placed on cleaner energy sources, and new liquefaction plants began operating.
Gas is consumed mostly in power stations and by residential users.
Expansionary drivers slackening?
How are these trends likely to evolve in the future? For the global shipping industry as a whole, further
growth in China’s seaborne trade is seen as a potentially highly valuable contributor to freight market
viability. Among shipowners in particular the rationale underlying capacity investment strategies is
often, implicitly or explicitly, based on an assumption that the broad direction of trade and especially
import demand in China will remain positive.
Many forecasters share this essentially upbeat outlook, although degrees of optimism vary.
Expectations for the short-term period of twelve months or so ahead often suggest significant
increases in volumes in numerous China trades. More distant future views, while maintaining a
generally positive stance, are inevitably more hazy, reflecting the great imponderables and
uncertainties surrounding not only events in China but around the world.
Among the main import trades into China, on which the global shipping industry has become heavily
dependent, growth prospects are not uniformly favourable. In several commodity sectors it is relatively
easy to justify predictions of continuing imports increases, although often difficult to quantify the
likely magnitude. Elsewhere, assumptions of sustained growth are not necessarily so solid: flat or
downwards trends can be envisaged, and are perhaps more realistically foreseen by cautious observers.
One factor adding complexity is the fairly frequent government policy changes which have a
noticeable impact on China’s trade movements. Numerous changes have a tendency to be
unpredictable to a large extent, magnifying uncertainty, as political influences are opaque. Some
22
BIMCO (2017), Chinese crude oil demand needs 45 additional VLCCs to support growth, October
23
earlier editions

Issue Ten May 2018
changes can be broadly envisaged as possibilities, but probability of introduction, scope and timing
cannot be reliably estimated. Consequently in these instances forecasting is speculative.
Coal imports are sometimes seen as an example of a trade which is more likely to go down than up,
especially in the longer term, given the negative pressures evident. Imports are a relatively small
element of China’s domestic coal market with about 7 percent currently, but seem vulnerable to
reduction. Although coal is likely to remain dominant among energy supplies for many years, measures
to curb consumption within the national anti-pollution strategy suggest unfavourable circumstances
for foreign suppliers.
A contrasting example is LNG imports where an upwards trend is clearly foreseeable. As a cleaner
energy source, natural gas consumption in China is set to increase over the years ahead. LNG demand
will be shaped also by domestic gas production and pipeline gas imports, but estimates point to strong
growth. According to recent estimates by the Australian Government, annual LNG imports into
China could rise cumulatively by 54 percent over the next three years.24
Underlying the prognostications for all seaborne trade elements are various assumptions about the
outlook for China’s economy, its growth rate and pattern of progress. Despite potential for setbacks,
most forecasts do not predict any severe downturn and suggest only a gradual slowing trend. This long-
established expectation reflects the Chinese government’s objectives. Shifting the economy away from
excessive reliance on investment and manufacturing, and towards consumer spending and services is a
policy intention, implying an overall slowing. While the Belt and Road Initiative could provide
additional support, the contribution awaits clarification.
The recent emergence of trade disputes creates additional anxiety. If the USA’s quarrel with China
remains unresolved, or leads to a widening round of protectionist moves, consequences could be
severe. Predictions are mostly not based on this view. Forecasts assume that China’s economy can
sustain a reasonably healthy enlargement, with only a gradual shift towards sectors where commodity
consumption is much lower. Such a view implies potential for incremental seaborne cargo movements,
albeit at a slower growth pace than seen in the recent past.
.......................................................................
Box 1: Superior economic performance and shift towards rebalancing
China’s remarkable macro-economic performance over many years has been a key driver of the
enlarging role in global seaborne trade which has unfolded. What has enabled the country’s
economy to grow so robustly, and what are the prospects for the next few years?
One prominent ingredient was continuously heavy capital investment, both government spending on
infrastructure projects (much of it large-scale) and business spending on new facilities. Consumer
21
Australian Government Department of Industry Innovation and Science (2018), Resources and Energy
Quarterly (Canberra: AGDIIS) March, 57. China’s LNG imports are forecast to rise from 37mt in 2017,
to 57mt in 2020.

Issue Ten May 2018
spending also became more conspicuous. Competitive exports of manufactured products were
instrumental in bolstering economic activity as well.
The Chinese government’s fiscal and monetary policies provided essential support for these trends. At
various times over the past years when the economy seemed to be slackening sharply, and especially
when a severe slowdown apparently was approaching, more government support was introduced
quickly. Additional infrastructure spending packages on a sizeable scale provided immediate boosts for
activity in various industries.
Although more recent interventions have greater relevance for today’s economic performance in
China, events of almost a decade ago merit a brief comment. In late 2008 China introduced a gigantic
fiscal stimulus package to buttress its economy amid the global financial crisis and recession. The
package was valued at Renminbi 4000 billion ($586 billion at the prevailing exchange rate), equivalent
to 12.5 percent of 2008 GDP.
Despite widespread scepticism among external observers about how much of this stimulus was ‘new’
spending as distinct from re-stating earlier spending commitments, the overall result was judged
successful. The package was implemented over a period of two years, with infrastructure spending
comprising about three-quarters, and was accompanied by expansionary monetary policy. These
measures prevented a major deceleration in the national growth rate but concerns remained, about
sustainability and the quality of some components, long after the event.25
The huge stimulus was especially beneficial to the international shipping market at a time when the
global economy as a whole had been severely weakened by the financial crisis. With its emphasis on
construction activity requiring steel and other products needing raw materials imports, the China
package assisted a seaborne trade and freight market revival to begin.
Since the post-crisis initial pick up in GDP growth to an average of just under 10 percent annually in
2010 and 2011, China’s economy has slowed gradually to under 8 percent in the following three years
and under 7 percent in the most recent three year period, including 6.9 percent in 2017. The slowing
has been aligned with government policy to move towards a more sustainable growth rate which could
be matched with available resources, and start a rebalancing process.
Doubts about the veracity of China’s GDP figures are sometimes expressed by analysts. It is often
argued that official figures overstate actual growth. 26
Three aspects reinforce these doubts: (a)
announced figures are almost always very close to the government’s target rate; (b) the figures are
published much faster than any advanced economies are able to provide a reliable calculation of their
22
Fardoust, Shahrokh; Lin, Justin Yifu and Luo, Xubei (2012), Demystifying China’s Fiscal Stimulus
(Washington DC: World Bank), October, 3, 5-6, 11-12, 21, 2723
Bloomberg (2018), ‘China’s 2015 GDP was exaggerated by fake data, analysis shows’, Hellenic
Shipping News, 2 February: “China’s growth rate in 2015 was probably overstated by a couple of
percentage points...”

Issue Ten May 2018
own results; and (c) while other economies frequently revise calculations greatly when more detailed
information becomes available later, China’s GDP figures are only minimally revised.
Nevertheless, the broad pattern in recent years seems to be a slowing economy. Short term changes
are probably not accurately reflected in the official data, which presents a smoother trend than
actually occurred. Other key economic indicators generally support an impression of a decelerating
sequence of annual GDP growth rates.
Several years ago, the Chinese government began emphasising a rebalancing of the economy,
recognising that the past investment- and export-led economic model probably is not sustainable
indefinitely. 27
But shifting the economy away from external towards domestic demand, from
investment to consumer spending, and from manufacturing to services is a huge task which is expected
to continue for a number of years.28
Investment spending remains an over-large component. This
rebalancing and ‘maturing’ process implies a slowing economic growth rate.29
It is still unclear what contribution to China’s economy will be made by the Belt & Road Initiative,
also known as One Belt, One Road, initiated by President Xi Jinping in 2013. Many projects within
this grand scheme, focusing on infrastructure building in numerous countries in Asia and elsewhere,
designed to improve connectivity and enhance economic and trade linkages, have begun or are
planned. While the concept has become more familiar and the general outlines of the scheme more
discernible, its overall magnitude and impact remains hard to gauge.
According to the OECD organisation in a detailed analysis published a year ago “the Chinese economy
will remain the major driver of global growth for the foreseeable future”.30
For China there are tough
challenges in ensuring high but gradually moderating economic output growth. The OECD comments
that “orderly rebalancing requires addressing corporate overleveraging, overcapacity in real estate and
heavy industries, and debt-financed over-investment in asset markets”.31
It seems set to prove a
difficult transition, although progress is being achieved.32
24
Zhang, Longmei (2016), Rebalancing in China – Progress and Prospects (New York: IMF), September, 325
OECD (2017), OECD Economic Surveys – China (Paris: OECD), March, 2326
Dizioli, Allan; Hunt, Benjamin; and Maliszewski, Wojciech (2016), Spillovers from the maturing of
China’s economy (New York: IMF), November, 427
OECD (2017), OECD Economic Surveys – China, 628
OECD (2017), OECD Economic Surveys – China, 229
Wolf, Martin (2018), ‘The Chinese economy is rebalancing’, Financial Times, 4 April: “the chances of
achieving desperately needed rebalancing and even of managing that transformation fairly smoothly
are rising”.

Issue Ten May 2018
2. Company Law
Venture capital investment trusts in China: legal framework,
challenges and reform (ii)
Authored by Dr. Chi Zhang33
The economic and political factors linked to VCITs in China
Compared with experienced fund management firms, the Chinese trust corporations’ unprofessional
management in VC businesses finds it difficult to establish their own market reputation. As an
alternative strategy, quite a large number of Chinese trust corporations choose to make ‘zero-loss
promises’ to investors, by which the trust corporations have successfully attracted more investors,
especially those individual investors who are rich but unwilling to undertake high risk, even though
the Rules (2009 Revision) has clarified that any trust corporations are not allowed to make any form
of ‘zero-loss promises’ to investors.34
As a result, the ‘zero loss promise’ has distorted the pricing
mechanism of Chinese VCITs market which fostered numerous irrational investors, and then
seriously threatened the efficiency and stability of the Chinese VC market. 35
In fact, the law and regulations consistently position trust investment including VCITs, as high-risk
financial investment activities. Ever since the second quarter of 2014, besides those institutional
33
Dr. Chi Zhang, Deputy Editor-in-Chief of the CECCA; Lecturer in Commercial Law at School of Law
and Humanities of China University of Mining and Technology (Beijing). Ph.D. in Law, The University of
Glasgow; LL.M. and LL.B., Tsinghua University. E-mail: chi.zhang@cecca.com.cn.
34
The Rules (2009 Revision), s 8 and 11.
35
MJ Wang and YT Cui, ‘Zero Loss Promises: the Dangerous Poison to China’s Trusts Industry’
(26 December 2013) <http://www.zhongguoxintuo.com/xtxw/4046.html> accessed 12 May 2016.
Editor’s Note
This article sheds light on the institutional framework and organisational structure of venture capital
investment trusts in China and analyses its main drawbacks in practice which lead to disapprovals of listing
application of the investee companies on the Chinese stock exchanges. By reference to the financial law of the
United Kingdom, this article provides a detailed reform proposal for Chinese venture capital investment trusts,
which focuses on the following three domains: the mixed ownership reform of the Chinese trust investment
corporations, preventing active intervention of trust beneficiaries in fund management and enhancing the
independence and monitoring power of custodian banks.

Issue Ten May 2018
investors, high net value (HNV) individuals had become the second-largest client base of trusts.36
The
problem is that even though those rich individuals have enough money to invest in VCITs, due to
their unprofessional vocational and educational backgrounds, quite a large number of them may not
have necessary knowledge37
to rationally consider the risks in complex financial investment and
business management. Consequently, when some CISs defaulted, more and more individual investors
irrationally or even violently requested the trust corporations to pay the full amount of principal and
interests.38
Therefore, the authorities also tend to require or to encourage the trustees to promise
zero-loss to investors39
for the purpose of securing the social stability of China, which is always
prioritised by the China Communist Party (CCP) and Chinese governments at any levels.
In addition, the shareholding structure of the sixty-eight trust corporations in China is also a notable
factor. According to the list of trust corporations released by the China Trustee Association (CTA),
fifty trust corporations are controlled by SOEs40
and five are controlled by the administrative bodies
of finance of provincial governments;41
in other words, at present around 80% of China’s trust
corporations are controlled by state-owned capital. Therefore, if the trust funds default, those state-
controlled trust corporations are able to repay the full amount of capital and interests to beneficiaries,
as strong SOEs or governmental shareholders can provide adequate cash to do so. Against this
background, it is obvious that the personal interests of the trust fund managers and the directors of
trust corporations have a close relationship with the SOEs or local governments’ nominating
committees. Considering this especial relationship of the clients of the trust corporations and
Chinese government, it is not unreasonable to conclude that both the lack of incentive mechanism in
the domain of organizational governance structure and conservative political climate in China
36
By the end of June of 2014, the CISs invested by qualified individual investors represented 26.36% of the
total amount in CISs in China, ranking only second to the CISs invested by institutional investors
(67.99%). XM Zhou,‘An Review of the Development of China Trust Industry during the Second Season of
2014- Stable Growth and Structural Optimization in Transitional Development’ (China Trustee
Association, 11 August 2014) <http://www.xtxh.net/xtxh/analyze/20279.htm> accessed 29 September 2016.
37
According to the Forbes China Private Wealth White Book (2010), by 2010 the HNV individuals from
Guangdong Province, Jiangsu Province, Zhejiang Province, Beijing and Shanghai represented 53% of all the
HNV individuals in Mainland China. By 2010, more than 53% of China’s HNV individuals came from (i)
manufacturing industry (19.8%), (ii) trade (22.3%) and (iii) real estate (11.6%), and in terms of the
educational background, as high a percentage as 31.4% of China’s HNV individuals do not hold a bachelors
or above degree from higher education institutions <http://www.forbeschina.com/upload/pdf-2.pdf>
accessed 13 May 2016.
38
See ‘Shanxi Branch of China Construction Bank Involved in the Default of JI Lin Trust Company
Limited: Investors Protested at the Gate’ (Takong Finance Daily, 27 February 2014)
<http://finance.takungpao.com/q/2014/0227/2306859.html> accessed 13 May 2016.
39
As regards this issue, for instance, s 2 (1) of The Direction on Risk Regulation of Trust Corporations
(2014) provides that
‘the shareholders of the trust corporation shall undertake or agree in the Articles of the corporation
to provide necessary liquidity support in the circumstance where the liquidity risk take places. If any
operating loss causes a loss to trust corporation’s capital, the corresponding amount of capital must
be reduced; and the scope of business shall be cut down or the shareholders of the trust corporation
shall timely increase the capital funds to make up for the deficit’
<http://www.cbrc.gov.cn/govView_69DB963082914C498028012863245973.html> accessed
15 May 2016.
40
For instance, 85% shares of Bank of Communication International Trust Company Limited are held by
Bank of Communication of China; 95% shares of Zhong Hai Trust Company Ltd are held by the China
National Offshore Oil Corporation.
41
For instance, 97.5% shares of Ji Lin Province Trust Company Limited are held by Ji Lin Provincial
Department of Finance, and so forth.

Issue Ten May 2018
motivate the management layer of trust corporations to avoid any loss to investors, no matter whether
or not the loss is caused by normal market risk.
In relation to the form of remedy for the losses to VCITs, in the situation that the trust corporations
fail to repay their promised profit to beneficiaries, the trustees have to settle the disputes in private,
rather than judicial procedures, because any zero promises will be at risk of being identified as invalid
by regulators and the courts. For example, trust corporations may sell the failing or bankrupt VCITs
to asset management companies or negotiate with local governments to seek bailouts, or even use
their own capital to repay investors’ losses.42
Moreover, in the traditional Chinese social culture, any
litigation may have a seriously negative impact on reputation of individuals, families and social
community. Thus, trust corporations have to do their best to avoid lawsuits for the purpose of
maintaining and protecting their vulnerable commercial reputation in the Chinese VC market.
Although the Law of Trusts (2001) and the regulations issued by the CBRC allow the participants in
investment trusts to solve disputes by means of litigation, until now however, there have been very
little litigation regarding disputes between the parties of trust investments.43
Consequently, the ‘zero-loss promise’ in Chinese trust industry has seriously led to two main
problems, the one is that the SOEs and governmental shareholders are actually using the money of
taxpayers, who are mostly ordinary citizens, to inappropriately pay for the rich who only represent an
extremely small portion of the whole population of China.44
The other legal problem is that until now
the Chinese courts have not yet issued any practical standard or official judicial interpretation in
regard of trustees’ fiduciary duties, and the widely accepted private dispute settlements for trustees
and beneficiaries also make it difficult to convey or expose the practical problems in China’s VCIT
market. Therefore, the authorities are not motivated to reform or to improve the legislation for their
own political concerns.
The barriers to IPOs of the VCIT-held companies in Chinese stock markets
At present, any VCIT-involved companies are generally prohibited by China Securities Regulatory
Commission (CSRC) from listing on the domestic stock markets of China for the reason that the
shareholding structure of such listing candidates cannot satisfy the disclosure requirements. Pursuant
42
In recent years, public attention has been drawn to a series of defaults in China’s collective investment
trust schemes, that is, Credit Equals Gold #1 Collective Trust Product (defaulted in January 2014) issued
by China Credit Trust Company Limited; C.R. Trust-Stable and Benefit CIS ( ) (defaulted in December
2013) issued by China Resources Trust Company Limited and so forth. The losses of all the
aforementioned default events have been covered by the trust corporations or a third party’s bailout.
43
For instance, An Xin Trust Company Limited v Chun Gao Company Limited (2013).
44
According to The Private Wealth Report of China (2013) issued by China Merchants Bank (CMB) and Bain
and Company China, by the end of 2013 high net value (HNV) individuals (the individuals who own
investable assets worth no less than RMB10 million) in China are expected to reach 0.84 million,
representing only 0.062% of the whole population (1.36 billion by the end of 2013)
<http://www.bain.cn/news.php?act=show&id=451> accessed 1 July 2016;‘The Data of the Population
Growth by the End of 2013’ (16 June 2014) <http://gz.bendibao.com/news/2014225/content152598.shtml>
accessed 1 July 2016.

Issue Ten May 2018
to the Law of Securities of China (2013 Revision),45
the listing requirement is that any company that
has been listed or is planning on being listed must disclose: (i) the name list of the top 10 shareholders
of the company and their respective shareholdings, and (ii) the persons in practical control of the
company46
for preventing the connected transactions problems. Subject to the duty of confidentiality
of the trust corporations, the detailed information of beneficiaries and their shareholding in VC funds
will not be disclosed to regulators and public investors. Therefore, the CSRC is likely to reject the
application of listing for the reason that, if the shareholder of a listed company is in the name of a
VCIT, public investors cannot identify who the actual controllers of the listed company are.47
More importantly, according to the principles of trust law, the real shareholder of the listed company
is the trust corporation, instead of the beneficiaries of VCITs.48
In consideration of the governance
structure of China’s trust funds, however, the beneficiaries can, in fact, actively participate in the
management of VCITs. As a result, if the voting powers of the beneficiaries of a given VCIT are
powerful enough to substantively determine the exercises of trust corporations’ voting rights in the
general meeting of shareholders of listed companies, public investors may have difficulties in
predicting the governance and operation of such listed companies. As a consequence, to exit
successfully from investee firms, trust corporations have to reorganize VCITs into other
organizational structures, such as a corporation or ‘trust–limited partnership’ structure, both of which
have increased the transaction costs in fund management.
Alternative approach ( ): IPO by transferring capital into a company
In this way, the one approach for listing is to transfer the fund capital temporarily into the trustee’s
own account. In such a way, the ownership of the trust assets will be clear and the application for
listing will be approved by the CSRC. Once the investee company listed, the trustee returns the
principal and profit of the VCITs to the beneficiaries. The separation of the trustee’s and principal’s
accounts is a basic rule in trust law, this transaction model however, challenges this statutory
requirement seriously. Another widely used alternative strategy is that the trust corporation may
establish a limited liability company or joint stock company and then transfer the funds of VCITs
into this shell company’s independent account for making the new company as a sole shareholder of
the company applying for listing. The problem is that, according to the Law of Companies of China
(2013 Revision),49
the numbers of promoters of an limited liability company or joint stock limited
company should not exceed 50 and 200 respectively,50
whereas the Rules (2009 Revision) does not
limit the number of qualified investors in any VCITs. Therefore, this alternative approach to listing
may not only unduly limit the scale of VCITs but also raise the transaction cost in raising trust funds
and exiting from the investee companies.
45
Hereinafter referred to as ‘the Law of Securities (2013 Revision)’.
46
The Law of Securities (2013 Revision), s 54 and 66.
47
L Guo, HY Tang, ‘The Legal Analysis of Trusts as Shareholders: focusing on Private Equity Investment
Trusts’ 2010 (3) Securities Market Herald 9.
48
Currently, the business trust under Chinese law does not have an organizational qualification as a
shareholder of a limited liability company.
49
Hereinafter referred to as ‘the Law of Companies (2013 Revision)’.
50
The Law of Companies (2013 Revision), s 24 and 78.

Issue Ten May 2018
Alternative approach ( ): IPO by altering the VCIT into a trust-partnership fund
Although VCITs are currently unable to exit from investee companies via IPOs, by contrast, limited
partnership VC funds have been allowed to invest in listed firms as an independent institutional
shareholder and are eligible to exit from the companies after listing.51
As an alternative approach, in
order to avoid transaction costs in establishing a company, VCIT investors developed a new structure
that combines the legal features of trust and limited partnership.
In the first stage, the trust corporation raises the VCIT as usual and then the trust corporation
employs a professional VC firm as the general partner of a limited partnership who will be in charge
of managing the trust fund. At the second stage, the VCIT (limited partner) and the VC firm (general
partner) subscribe around 90% and 10% of the funds respectively. In the process of the fund
operation, the beneficiaries will be charged fixed fees by both of the trust corporation and VC firm,
and the general partner will earn carried interest only if a hurdle rate of profit has been reached.
Figure 2 indicates that the shareholding structure of the ‘trust–limited partnership’ VC fund is much
more complicated than general VCITs or limited partnership funds. Moreover, this organizational
form will decrease the actual profit of beneficiaries, because the trust corporation has to share a
portion of profit with the VC firms (general partner).
The efficiency of such an organisational structure however, is problematic. According to s 30 of the
Law of Trusts (2001) and s 26 of the Measures for the Administration of Trust Companies (2007), the
trustee is allowed to re-entrust the business of the trust fund to other persons, but the trustee must be
liable for all the legal consequences of the re-entrustment. However, s 21 of the Guideline (2008)
stipulates that ‘the investment adviser should only provide consultancy for the trust corporation and
the investment decision should be independently and solely made by the trust corporation’. In other
words, any investment decision directly made by external VC firms in VCITs should be invalid and
illegal. In fact, the ‘trust–limited partnership fund’ has changed the function of investment trusts
essentially. Here the trust corporation only plays a role as an intermediary or conduit between the
investment adviser and beneficiaries, its profit only comes from the fixed management fee paid by
investors, which means that after the establishment of the fund, the trust corporation may not have
strong motivation to supervise the VC firm’s performance. Consequently, although this type of VC
fund may temporarily make it possible to exit by IPO, the transaction costs in such a complicated
organisational structure is evidently higher than the simple structure of VC funds.
51
According to s 19 of the revised Measures for the Administration of Securities Registration and Clearing
(2009 Revision), partnership enterprises which are registered in mainland China are qualified to apply to
establish securities accounts.

Issue Ten May 2018
A proposal for the legal reform of VCITs in China
It is obvious that the existing regulatory approaches and governance structures of the trust-type VC
funds of China can neither effectively secure the safety of investment nor efficiently promote the
trust corporation’s management of VC investments. With reference to international experience and
lessons, this article tries to provide a guideline for further legal reform of China’s VCITs, which
focuses on the following domains: (i) breaking the zero-loss promise; (ii) clarifying the boundary of
trustees’ fiduciary duties; (iii) enhancing the custodian banks’ supervision role in VCITs. Eventually, if
the above issues can be sorted, the barrier to IPO of VCITs-involved companies in Chinese stock
markets may be solved.
Break the ‘zero-loss promises’: mixed Ownership reform of the trust corporations
Since the Decision on Major Issues Concerning Comprehensively Deepening Reforms52
was released
by the Central Committee of the CCP in November 2013, a new wave of marketization reform of
China’s SOEs has been launched. It is proven in this article that the state-controlled ownership
structure of the Chinese trust investment corporations is one of the factors causing both the
inefficient governance structure of VCITs and the barrier to the IPOs of VCIT-involved companies
in China’s domestic stock markets. Therefore, this article concludes that the mixed ownership reform
of trust corporations is an essential way to break the zero-loss promise myth and rebuild the
rationality in the VCIT market.
Specifically, strategic institutional investors should be positively encouraged to invest in or even
control state-owned trust corporations, by which the diversified shareholders will be willing to refuse
52
Hereinafter referred to as ‘the Decision (2013)’.
Figure 2: The legal structure of the VCITs with ‘trust with limited partnership’ form

Issue Ten May 2018
the unreasonable ‘zero-loss promise’. In such a way, the non-state shareholders can also impose
pressure on the managers of the trust corporations, by which the lack of private owners of SOEs will
be solved and the quality of corporate governance of the trust corporations will be improved. At
present, the first pilot reform of trust investment corporations was finalized by early 2015, the SDIC
Trust Corporation Company Limited, one of the state-owned trust corporations, was invested by two
non-state financial firms, and, as a result, the shareholding of non-state shareholders makes up 35% of
the ownership structure of the SDIC. 53
Therefore, it can be expected that the further mixed
ownership reform of the trust industry in China will be promoted and encouraged in the near future
for the purpose of improving the efficiency of corporate governance and breaking the zero-loss
promise.
Trustee’s independent management and establish fiduciary duty rules
Remove beneficiaries’ inefficient intervention
In terms of beneficiaries’ right of decision-making, when beneficiaries are dissatisfied with the
performance of the trust corporations, according to both the Law of Trusts (2001)54
and s 42 of the
Rule (2009 Revision), the beneficiaries are able to intervene in the management by exercising their
voting right. As analyzed above, however, quite few unprofessional investors can give beneficial
advices on decision-making of VC investment. In this aspect, the depositary and regulator may jointly
make an effort to defuse investors’ dissatisfaction efficiently. Pursuant to the Financial Services and
Markets Act 200055
in the UK, any proposals aiming to alter any provisions of the trust deed or to
replace its fund manager must be approved by the Financial Conduct Authority (FCA) and the trustee
must submit a written notice stating the reasons for such an alteration to the regulator;56
that is to
say, the intention to make any alteration to the fund must be verified by the professional institutions
rather than unprofessional investors.57
Accordingly, the rules regarding the power of beneficiaries’ meeting of China’s VCIT regulatory
regime might be improved as follows:
53
QS Liu, ‘The Mixed Ownership Reform of SDIC Trust Corporation’ Finance Sina, (Beijing, 26 January
2015) <http://finance.sina.com.cn/leadership/mroll/20150126/110921397351.shtml> accessed 24 June 2016.
54
Section 21 of the Law of Trusts (2001) prescribes that ‘[t]he trustor has the right to ask the trustee to
adjust the methods of management of the trust property if the methods prevents the realization of the
purposes of the trust or are not in accordance with the interests of the beneficiary due to special causes
that are not foreseen when the trust was established’.
55
Hereinafter referred to as the ‘FSMA (2000)’.
56
Section 251 of the FSMA (2000).
57
In terms of the rules of voting powers of investors’ general meeting under the FSMA (2000), according
to COLL4.3.4 of the FCA Handbook, only those ‘Fundamental changes including ‘(a) changes the
purposes or nature of the scheme; or (b) may materially prejudice a unitholder; or (c) alters the risk
profile of the scheme; or (d) introduces any new type of payment out of scheme property’ need to be
approved by the general meeting. While the Handbook also provides that the appointment or replacement
of a manager of an authorised unit trust (AUT) is a ‘significant change’ which generally does not need to be
approved by the investors general meeting and the law only requires the pre-event notification to all the
investors (COLL 4.3.6A). Similarly, any change of a depositary is also only determined by FCA, the
investors are not allowed to directly participate in the determination of such a change but are entitled to
be notified pre- or post the event (COLL 4.3.9(e)). <http://fshandbook.info/FS/html/FCA/COLL/4/3>
accessed 16 June 2016.

Issue Ten May 2018
Firstly, as the custodian banks are entitled to consistently monitor the manager’s behaviors, a feasible
and cost-efficient way of dealing with beneficiaries’ dissatisfaction with the trustee’s performance is to
require the beneficiaries who are unsatisfied with the trustee’s performance to complain to the
depositary (mostly the custodian banks in China). The custodian is capable to determine whether the
trust corporation’s conduct should be adjusted on the grounds of its independent investigation of the
issue. If the custodian bank agrees to adjust the management of the trust fund, in accordance with s
22 of the Rules (2009 Revision), the custodian must require the trustee to make change of the
decision-making in a written notice and, in the meantime, if the trust corporation refuses to make any
correction, the custodian bank must report it to the CBRC promptly, the CBRC may give suggestions
for the beneficiaries. Where the beneficiaries still feel dissatisfied with the regulator’s decision, they
have the right to assign their shares in the fund to other qualified investors.58
Secondly, in the circumstances where the trust corporation breaches its fiduciary duty or unduly
disposes of trust assets and causes loss to beneficiaries, the CBRC entitles the beneficiaries’ meeting
to determine power to dismiss59
or change60
the trustee directly, which may be overly powerful.
However, neither the financial regulations nor the Law of Trusts (2001) imposes a duty of approval on
the regulator. Although most investors are risk-averse, the normal market risk should be assumed by
investors themselves, otherwise the pricing system of the VC market will be ineffective. In order to
improve the efficiency of the decision-making process, it is recommended that trust beneficiaries’
power of replacing a trustee should be revised as ‘a power of report to the custodian’61
and the
custodian has the duty to investigate the beneficiaries’ complaint. If the custodian also agrees to
change the trust corporation, it must provide a detailed report to the CBRC and the final decision
should be made by the regulator.
Establishing judicial rules to clarify trustees’ fiduciary duties
As analyzed by scholars that the economic efficiency of trust law is on the ground of the separation of
ownership and control of trust property62
and the fiduciary duty is a remedial mechanism for the
principal to protect him-herself against the agent’s discretionary power, which is mainly carried out
and standardized by the courts. In Chinese trust law system, however, the court’s statutory judicial
power of intervention is quite limited: up to now there are only two provisions that generally
prescribe the court’s role in trust businesses. Specifically, s 22 and 23 of the Law of Trusts (2001)
respectively provides that ‘if the trustee disposes of the trust property against the purposes of the
trust or causes losses to the trust property due to violation of duties or improper handling of the trust
affairs, the trustor has the right to petition to the people’s court for withdrawing the disposition’ and
58
Section 29 of the Rules (2009 Revision) provides that ‘[i]n the duration of a trust scheme, the beneficiary
can transfer its trust units to qualified investors. The trust company shall conduct procedures for the
beneficiary with that respect.’
59
The Law of Trusts (2001), s 23.
60
The Rules (2009 Revision), s 42(3).
61
Furthermore, it is also recommended that the voting procedure of beneficiaries’ meeting, which is
prescribed in s 46 of the Rules (2009 Revision), should be amended as ‘any proposal to alter the property
utilization approaches or to replace a trust corporation should be agreed by at a simple majority (but not
all) of the votes present at the meeting’.
62
RH Sitkoff, ‘The Economic Structure of Fiduciary Law’ (2011) 91 Boston University Law Review
1039

Issue Ten May 2018
‘[i]f the trustee disposes of the trust property against the purposes of the trust or is at serious fault in
course of managing, utilizing or disposing of the trust property, the trustor has the right to remove
the trustee according to the provisions of the trust documents or petition to the people’s court to
replace the trustee’. The function of both the provisions has made it possible for investors in VCITs
to be relieved by the court where their interests are being or have been infringed by the trustee’s
misconducts. Owing to the undue intervention by beneficiaries’ meeting, however, a similar remedial
function of the court’s power to withdraw has not been sufficiently exercised.
In fact, once the law and regulations removes beneficiaries’ intervention power, the disputes between
trust corporations and investors must be settled by a neutral third party. In order to reduce litigation
costs, the basic procedure of dispute settlement can be arranged as follows: any disputes should be
preliminarily settled by the CBRC and then if the parties are not satisfied with the decision made by
the CBRC, they should be entitled to file a lawsuit claiming compensation against the trustee who
breaches its fiduciary duty and causes loss to investors, or to replace such a trustee. Correspondingly,
the court may exercise its judicial power to invalidate any misconducts of the trust corporation and to
compel the trust corporation to compensate the beneficiaries. The court should also have an exclusive
right to replace a trust corporation to protect beneficiaries’ interests. Under the present commercial
law system of China, practical standards of fiduciary duties can only be established by removing
beneficiaries’ direct intervention and encouraging the court to actively exercise the powers of
replacing a trustee, as fiduciary duty is a kind of practical ‘standard’ instead of ‘rules’, the effectiveness
of which can only be achieved on a case-by-case basis63
.
In a nutshell, if the Chinese court can play a leading role in dispute settlement regarding the agency
problems in VCITs, trust corporations can clearly identify the ambit of legal duties from the verdicts
by the court, and investors will also recognise the circumstances in which the law and the court may
exempt trust corporations from the liability and investors themselves have to suffer the loss at their
own risk. Only in this way investors can be educated to consider the potential risk and their actual
risk tolerance more prudentially and rationally before engaging in venture capital investment; and the
trust corporations will also have a strong incentive and pressure to promote their performance of fund
management.
The legal reform of custodian banks of VCITs in China
Custodian bank as the co-trustee of VCITs
One of the problems relating to the custodian banks of China’s VCITs is the lack of direct legal
relationship between the custodian bank beneficiaries under the basic principle of trust law. In this
situation, once the custodian fails to fulfil its duty of safeguarding, the beneficiaries are unable to
claim against the custodian in accordance with the principles of trusts or contracts.
63
See L Kaplow, ‘Rules versus Standards: An Economic Analysis’ (1992) 42 Duke Law Journal 557.

Issue Ten May 2018
In this aspect, the experience of the UK’s CISs regulatory system may have some useful
implications.64
The FSMA (2000) provides that the application of a CIS registered in the UK must be
made to the authority by the manager and trustee who should be independent from each other.65
Pursuant to the Glossary of Financial Conduct Authority Handbook (2014),66
the ‘depositary’67
is the
trustee of an authorized unit trust (AUT) and the main duties of a depositary are (i) safekeeping of the
trust property and (ii) overseeing of the fund manager’s performance. 68
Therefore, depositary
trustees are required to fulfill their duties under the UK trust law.69
What is more, if the trustee
violates the duties under the FSMA (2000), the FCA has the power to revoke an authorization made
by the manager and trustee of an AUT70
and if the FCA opines that the trustee has contravened or is
likely to contravene the obligations imposed by the FSMA (2002),71
the FCA has the power to force
the trustee to terminate the scheme up72
and the court has the power to issue an order to remove the
trustee as well.73
In terms of the regulatory framework under the FSMA (2000), the further issue is what the nature of
the relationship is between the investors and managers of a unit trust. Although the FSMA (2000)
does not clarify the legal status of the manager of AUTs, at least the contractual relationship between
investors and the manager makes it possible to allow investors to claim against the manager for breach
of duties under the contract. The difference between the manager of AUTs as trustee or contractual
party is that, if the manager is statutorily defined as the trustee of CISs, the manager must fulfill the
obligations in accordance with a higher standard. Moreover, some equitable remedial approaches (e.g.,
the tracing right) provided by equity and general trust law will apply, which means that if the fund
manager is regarded as the trustee of investors, the legal protection of beneficiaries’ interest will be
sounder than a contractual relationship.74
Inspired by the above regulatory approaches, to protect the interests of beneficiaries and to supervise
the custodian’s conducts in Chinese VCITs, the CBRC should expressly define the legal status of
custodian banks of VCITs as trustees. From a macro perspective, at present stage, different sectors of
Chinese financial markets such as commercial banks, insurance companies and trust corporations are
operated and regulated separately.75
Generally speaking, other unprofessional financial institutions
64
Under Part XVII of the FSMA (2000) ‘Collective Investment Schemes (CISs)’, there are three main
types of CISs, namely (i) AUT schemes, (ii) open-ended investment companies and (iii) recognized
overseas schemes. By functional comparison, the AUT is a legal structure similar to China’s VCITs.
65
FSMA (2000), s 242(1)–(2) and 243(4).
66
This document is available at http://fshandbook.info/FS/html/FCA/COLL/6/2.
67
The term ‘depositary’ under the FSMA (2000) is the same as both the ‘custodian’ in the Trustee Act
(2000) in the UK and ‘custodian bank’ in Chinese law; both of which are mainly in charge of the
safekeeping of trust assets.
68
See details in the section on ‘Collective Investment Schemes Sourcebook’ of the Financial Conduct
Authority Handbook <http://fshandbook.info/FS/html/FCA/COLL/6/6> accessed 16 June 2016.
69
Furthermore, s 253 of the FSMA (2000) does not allow the parties to waive the trustee’s duty of care,
hence the trustee (depositary) of AUTs should comply with the requirement of the duty of care under the
Trustee Act (2000).
70
FSMA (2000), s 254.
71
Ibid., s 257(1)(b).
72
Ibid., s 257(2)(b).
73
Ibid., s 258(1)(a).
74
IG MacNeil, An Introduction to the Law on Financial Investment (2nd edn, Hart Publishing, 2012) 182–183.
75
For more background information see Guo (n 5) 93–98.

Issue Ten May 2018
such as securities brokers and commercial banks are not permitted to engage in trust business in
China. Thus, although the governance structure of CISs under the FSMA (2000) provides a mixed
regulatory model for beneficiaries, which means that beneficiaries are able to exercise the remedial
powers against both the trustee based on fiduciary law and the manager based on contract
respectively. In China, however, it may be costly to interchange the legal statuses of the trust
corporations and custodian banks (actually the depositary). Therefore, under the existing Chinese
regulatory system, the trust investment corporation should still be the fund manager and trustee of
VCITs.
Firstly, the Law of Commercial Banks (2003 Revision) does not absolutely prohibit the Chinese
commercial banks from engaging in trust investment,76
it is feasible to allow custodian banks to be the
co-trustee of VCITs. It is recommended that the CBRC should clarify the legal status of the
custodian bank to be the co-trustee of VCITs. In this way, the CBRC and the court can also impose
the duties of care and of loyalty on custodian banks77
in accordance with trust law principles.
Secondly, according to s 32 of the Law of Trusts (2001), if the trust corporation breaches the duties of
law or in the trust deed, the custodian bank as a co-trustee should be jointly liable for the losses to
beneficiaries. Such joint liability can motivate the custodian bank to carefully supervise and to check
every instruction of dealing proposed by the trust corporation, which can improve the custodian
bank’s supervision function.
Appointment procedure and incentive mechanism of custodian banks
Accordingly, if the legal status of the custodian bank is a co-trustee, the appointment of the custodian
should therefore, be determined by investors, instead of the trust corporation. Subject to the lack of
professional knowledge, however, the investors may not be able to determine the selection of a
custodian for VCITs properly. Alternatively, the laws can entitle the appointment power to the
CBRC who will make the commission on behalf of the beneficiaries of VCITs.
Firstly, in order to establish a competitive market for custodian business, the trust corporation should
draft a list of candidate commercial banks by way of an open tendering system and then submit the
list of candidates to the CBRC for approval. The CBRC as the chief regulator of business trusts
should carefully check each candidate bank’s documents, compare the records of each bank’s
historical performance and finally appoint one of the candidates as the custodian bank for the given
trust fund. The advantage of this appointment procedure is that the employment of a custodian bank
76
Section 43 of the Law of Commercial Banks (2003 Revision) provides that ‘No commercial banks may,
within the territory of the People’s Republic of China, engage in trust investment or securities business, or
invest in immovable property which is not for private use, in non-banking financial institutions or in
enterprises, except where otherwise provided for in the regulations of the State.’
77
In this regard, s 25 of the Law of Trusts (2001) prescribes that ‘[t]he trustee shall fulfil his duties and
perform the obligation of being honest, trustworthy and cautious, and managing effectively’and s 4 of the
Rules (2009 Revision) also requires that the trust corporations ‘shall be faithful to its duties and fulfill the
obligation of being honest, credible, prudent and diligent, so as to best serve the beneficiaries’, both of
which are the current legal basis of the trustee’s fiduciary duty regime under China’s trusts system.

Issue Ten May 2018
will no longer be exclusively determined by the fund manager, but a neutral regulator who can only
make a judgement based on the professional performance and reputation of each candidate bank.
It will be difficult to accurately record and evaluate the performance of the one who is in the position
as an agent, therefore the incentive mechanism is important to solve agency problem.78
If custodian
banks are permitted to earn a proportion of the performance fee from the profit of the funds,
custodian banks will have a motivation to secure transactions, at least they may have incentive to
prevent the trust corporation from engaging in overly high risk projects. 79
In detail, it is
recommended that the CBRC should revise the Rules (2009 Revision) as: any appointed custodian
bank should be in a position of a trustee and then the custodian fee and performance fee should be
calculated through negotiation between beneficiaries, the trust corporation and the custodian bank.
However, in the meantime, the regulation may statutorily require that the ‘performance fee’ for
custodians should not surpass the amount of the fixed custodian fee. Furthermore, with reference to
the relevant provision of the Law of Trusts (2001), 80
the CBRC may consider adding similar
provisions in the Rules (2009 Revision) that if the custodian bank fails to safeguard the security of
trust property or does not properly supervise the instructions proposed by the trust corporation, the
custodian will not be allowed to earn any custodian fee before the loss has been compensated. Finally,
because the custodian is recognized as a trustee of VCITs, that is, where the custodian contravenes
the duties, the beneficiaries’ general meeting should have the power to replace the delinquent custody
subject to the CBRC’s approval.
Custodian banks’ power of intervention against trust corporations
According to the Rules (2009 Revision), in the scenario where the custodian ensure that the trust
corporation has breached its duties, the custody has the right to notify the trustee or to report it to
the CBRC in good time.81
However, the custodian bank does not have any substantive power of
intervention to rectify the trust corporation’s misconducts, which seriously reduces the effectiveness
of the custodian’s supervision. Pursuant to part COLL 6.6.14(4) of the CIS Sourcebook of FCA,82
in
contrast, the depositaries of CISs are entitled to notice or warn the trust corporation of the breach of
78
AA Alchian and H Demsetz, ‘Production, Information Costs and Economic Organizations’ (1972) 62
American Economic Review 777.
79
According to a self-regulated document for commercial banks’ custodian business, namely the Guideline
for the Price of Custodian Banking Products issued by the China Banking Association (CBA), the
recommended rate of custodian fees for trusts business is 0.15–0.6% of the fund capital. By contrast, trust
corporations who only play a role as the ‘conduit of capital’ but not a managing or active party in operating
the funds, are entitled to gain the management of 1–2% of the fund. Such a fee structure may not provide
adequate incentive to the custodian bank to work hard in the interest of beneficiaries.
<http://www.chinaprice.gov.cn/fgw/chinaprice/free/redian/M_H_0_0898_100318.htm> accessed 17 June
2016.
80
Section 36 of the Law of Trusts (2001) stipulates that ‘If the trustee disposes of the trust property
against the purposes of the trust or causes losses to the trust property due to violation of the management
duties or improper handling of the trust affairs, the trustee must not ask for remuneration before he has
reverted the trust property or made compensations.’
81
The Rules (2009 Revision), s 22.
82
Hereinafter referred to as the ‘FCA Sourcebook’.

Issue Ten May 2018
duties.83
If the request or instruction given by a managing trustee eventually results in the breach of
trust, the depositaries should refuse to act under the managing trustee’s orders. Furthermore, part
COLL 6.6.10 of the FCA Sourcebook expressly requires that any investment or disposition of the
scheme property proposed by the fund manager must obtain the consent of the depositary and if the
depositary has the reason to question the trustee/manager’s investment proposal, the depositary has
the power to request the fund manager to change the proposal.84
As for the custodians of VCITs in China, the financial regulation should additionally entitle trustees
the power of refusing to obey any unjustified instruction given by the trust corporation. If the trust
corporation refuses to rectify its misconduct upon the custodian’s notification, the custodian bank
must inform the CBRC of the above issues promptly for minimizing potential loss to the
beneficiaries. Furthermore, if the custodian bank fails to fulfill the above duties and then causes any
loss to beneficiaries, the trust law will require the custodian to be jointly liable for the loss caused by
the trust corporation’s fault. In such a way, the custodian banks may play a more active and positive
role in enhancing the protection for the beneficiaries of VCITs, and the more competitive markets of
custodian businesses will also make the contracting process between the custodian banks and trust
corporations more equitable.
Conclusion
This article has presented the fundamental regime of venture capital investment trusts under the
existing commercial law system of China. The emergence of trust-type VC funds in China is actually a
practical response to a series of particular political and economic backgrounds. However, the trust is
actually not a suitable organizational structure for VC investments. In fact, this article has shown that
the lack of powerful judicial intervention has been an essential barrier to enhancing the protection of
beneficiaries of VC trust funds. Particularly, the so-called ‘zero loss promise’ backed by state-owned
capital of the trust investment corporations has seriously distorted the pricing mechanism of the
Chinese VC market, so that VC investors tend to invest in venture capital investment trusts without
rational consideration and understanding of high risk in VC market. Moreover, the closely interested
relationship of the custodian banks and trust corporations has essentially weakened the custodies’
function of safeguarding the trust interest of beneficiaries of trust funds. Against such a complicated
background, the CBRC regulation has no choice but to entitle beneficiaries overly strong voting
powers in decision-making of VC trust funds, which has formed a very inefficient governance
structure of the trust funds and eventually increased the costs remarkably in exiting and cashing via
listing the investee companies on the Chinese stock exchanges.
The prospect of Chinese VCITs mainly depends on the mixed ownership reform of those state-
controlled trust corporations, the ‘zero loss promise’ may be broken by diversified interest pattern at
corporate governance level of the trustees. Specifically, the present pilot ownership reform of several
selected trust corporations has shown that the unprofessional and lagging management of VCITs has
83
For details, see the section on ‘Collective Investment Schemes Sourcebook’ of the Financial Conduct
Authority Handbook <http://fshandbook.info/FS/html/FCA/COLL/6/6> accessed 21 June 2016.
84
Ibid.

Issue Ten May 2018
pushed the CBRC to encourage non-state enterprises or institutions to invest in the trust
corporations and to dilute state control, by which the high quality investment decision-making
experience may be introduced. The last point, in contrast to beneficiaries’ direct intervention in fund
management, judicial adjudications settling the disputes between trustees and beneficiaries will be
able to provide more efficient remedies for the beneficiaries of VCITs, of course, such a reform may
take time. Finally, the barrier to IPOs may be successfully coped with when the trustee is able to
independently exercise its shareholder right in listed companies.

Issue Ten May 2018
3. Transport Law
3.1 The Rotterdam rules effect on Chinese cargo owners (i)
Authored by Prof Liying Zhang85
I. Introduction
The United Nations Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea
(Rotterdam Rules or the Convention), adopted by the United Nations ('UN') in 2008, is the fourth
international convention concerns carriage of goods by sea. As a leading power in maritime transport
and trade, China's decision of whether to accede to the Rotterdam Rules has been closely watched by
the international community. From the prospective of China, both the interest of carriers and that of
the cargo owners must be carefully considered when deciding whether to accede to the Rules.
85
Liying Zhang, Professor of Law, China University of Political Science and Law, Director of the CUPL
Maritime Law Centre, Arbitrator of China Maritime Arbitration Commission, Executive Director of
China Maritime Law Association, Project Leader of the research project 'The Effect of Rotterdam Rules
on China's Import and Export Trade', entrusted by the Ministry of Commerce of the People's Republic of
China in 2010.
This article was first published on Asia Pacific Law Review, full citation is (2013) 21: 1 Asia Pacific L Rev 27
Editor’s Note:
The Rotterdam Rules, the 4th
international convention concerning the carriage of goods by sea adopted by the
UN in 2008, attempted to balance the carrier’s and cargo owner’s interests for the second time. In order to assist
the Chinese government with making the decision on the rules, a research project was established and entrusted
to the Maritime Law Centre at China University of Political Science and Law (CUPL).
In order to gain a closer look to the Rotterdam Rules' effect on Chinese cargo owners, the research group of the
Project conducted a survey with the method of questionnaires, and this article is a detailed report about the
results of this survey. According to the survey, the response to the Rotterdam Rules is not positive. Generally
speaking, the main items of oppositions by the cargo owners are the areas relating to the delivery of goods without
a Bill of Lading (B/L), the documentary shipper, the transportation of dangerous goods and the burden of proof.

Issue Ten May 2018
In assisting the Chinese government on making this decision, the Department of Treaty and Law of
China's Ministry of Commerce (MOFCOM) has established a research project entitled 'The Effect of
Rotterdam Rules on China's Import and Export Trade' (the Project). Specifically, this research
project was entrusted to the Maritime Law Centre of China University of Political Science and Law.
In order to gain a closer look as to the Rotterdam Rules' effect on Chinese cargo owners, the
research group of the Project conducted a questionnaire survey. Specifically, samples were selected
according to their locations, business types, trade volumes and target countries.86
The research group
through MOFCOM distributed and retrieved more than 300 questionnaires from cargo owners and
freight forwarding companies all over the country. After that, the research group held a series of
symposiums with key companies and cargo owner associations to discuss some specific questions.
Based on this, this research analyses the Rotterdam Rules application and its effect on cargo owners.
The Rotterdam Rules has raised the carriers' liability. Why have so many negative responses emerged
from domestic and foreign cargo owners?87
The paper endeavours to explore the reasons from the
perspective of cargo owners. All the statistics concerning cargo owner companies or freight
forwarding companies' responses originate from the data collected from the survey.
A. The application of the Rotterdam Rules
1.The double internationally standards
Judging from the provisions on scope of application of the Rotterdam Rules, even if China does not
join the Rotterdam Rules, Chinese courts may resort to the Rules in settling disputes relating to
carriage of goods by sea, which is known as 'passive application'. Pursuant to art 5 of the Convention,
the Convention shall apply to a contract of carriage provided if: (i) the place of receipt and the place
of delivery are in different States; and (ii) at the same time, the port of loading of a sea carriage and
the port of discharge of the same sea carriage are in different states. This is called 'double
internationality standard'. Moreover, for the Convention to apply, as art 5 requires, there must be a
sensible connecting factor to a contracting state, that is, the place of receipt, the port of loading, the
place of delivery or the port of discharge must be located in a contracting state. In this case, even if
China does not join the Convention, once it takes effect, it may apply to Chinese companies in the
course of international carriage of goods by sea. To illustrate, assuming a Chinese seller located at
Shanghai arranges for a contract of carriage by sea, in order to send the goods to a US purchaser
located at Los Angeles. If the goods suffer from damage during the sea voyage and the seller files a law
suit, the Rotterdam Rules may apply as long as the standards in art 5 are met, though China has not yet
signed the Convention.
2. Chinese companies' trading partners and their attitudes
86
Please see the Annex for details of the selection of samples.
87
See the Position Papers of ESC, CLECAT, FIATA, IRU AND UNECE under <Rotterdam Rules: On-
line Resources>, website of UNCITRAL; available at:
http://www.uncitral.org/uncitral/uncitral_texts/transport_goods/2008rotterdam_rules/online_resources.ht
ml.

Issue Ten May 2018
The aforementioned 'passive application' of the Rotterdam Rules will necessarily involve many other
countries apart from China, including: (i) China's trading partner countries; (ii) the carriers' home
countries; and (ii) the countries along the transport routes. Because of this, the questionnaire was filed
to various Chinese companies' trade partner countries, to which three hundred companies have
submitted responses. The statistics show that 62 per cent of the companies have business transactions
with US companies, 46 per cent with Japanese companies, 31 per cent with South American
companies, 31 per cent with Australian companies, 69 per cent with European Union companies, 38
per cent with Southeast Asian companies, 38 per cent with African companies and 15 per cent with
Middle East companies.88
As mentioned above, if China's trading partner countries ratify the Rotterdam Rules, the Convention
may nevertheless apply to China indirectly. Therefore, it is important to keep an eye on relevant
countries' attitudes towards the Rotterdam Rules, especially the main trade partner countries of
Chinese companies. As of 22 July 2012, twenty-four countries have signed the Rotterdam Rules (see
Table 1 and Chart 1), and Spain and Togo have ratified the Convention (in 2011 and 2012,
respectively).89
Although signatures are not ratifications and approvals, and only two countries have
ratified the convention, it reveals the positive attitude of these countries towards the Rotterdam Rules.
88
It needs to be pointed out that there are many multiple-response questions in the questionnaire. That is
to say the respondents are allowed to choose more than one item under these questions. This question is
one of them.
89
<Introduction> of Rotterdam Rules website; available at: www.rotterdamrules.com/ en. Sweden is the
24th state to sign the Rotterdam Rules; available at: http://www.unis.
unvienna.org/unis/pressrels/2011/unisl156.html.

Issue Ten May 2018
Table 1: The Signature Status of the Rotterdam Rules90
90
The status of the Rotterdam Rules is available at:
http://www.uncitral.org/uncitral/en/uncitral_texts/transport_goods/rotterdam_status.html.

Issue Ten May 2018
Chart 1: Geographic Distribution of the Signatories of the Rotterdam Rules.91
This research firstly analyses China's trading partner countries along with the countries holding
positive attitudes towards the Rotterdam Rules. To begin with, it should be noted that 60 per cent of
Chinese companies' trading partner countries are European or American countries. Further, it should
be noted that among the European countries, the Great Britain and Germany, which have large trade
volumes with China, did not sign the Convention. Similarly in North and South America, the United
States is the only signatory.
However, it will have a substantial effect on the foreign trade of China concerning trade volumes.
Therefore, let us analyse the signatories along with the country ranking of world merchandise trade.
Among the twenty-four signatories, about half of them rank 50th and below. It can be shown from
Table 2 that four signatories rank 20th and above, six between 21st and 50th, two between 51st and
80th, and 12 80th and below.92
As shown in Table 3, among China's top ten trade partners, the United
States (US) is the only signatory to the Rotterdam Rules. On the other hand, among the top ten
countries which have the biggest trade volumes, as shown in Table 2, three of them signed the
Rotterdam Rules, namely the US, France and the Netherlands. This is to say, if the Convention takes
effect in these three countries, it is highly possible that the Convention will apply to China passively
even if China does not join the Convention.
91
The statistics used in Picture 1 stem from Chart 1
92
There are 182 countries ranked in the original table; available at
http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_122529.pdf; The World Trade Organization's
International Trade Statistics 2011 also has a similar ranking table, but it merely ranks the top 50 exporters
and importers of the world; available at:
http://www.wto.org/english/res_e/statis_e/its2011_e/its11_world_trade_dev_e.pdf.

Issue Ten May 2018
Table 2: Leading Exporters and Importers of Merchandise Trade in the World (2010) 93
(Including EU27 Member States and intra-EU Trade)
Top Ten Exporters and Importers of Merchandise Trade.94
93
The source of the data in this table is the IMF (Direction of Trade Statistics); table is available at:
http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_122529.pdf.
94
Appendix Table 3 'Merchandise Trade: Leading Exporters and Importers, 2011' from Trade Growth to
Slow in 2012 After Strong Deceleration in 2011, WTO 2012 Press Releases; available at:
http://www.wto.org/english/news_e/pres12_e/pr658_e.htm.

Issue Ten May 2018
Table 3: China's Top Ten Trade Partners, 2010 ($ billion ) 95
Source: China's Customs Statistics , PRC General Administration of Customs
The questionnaire also investigated the application of other Conventions in the past. Among the
investigated transport contracts between cargo owner companies and carriers, 38 per cent of the
contracts adopt the International Convention for the Unification of Certain Rules of Law relating to Bills of
Lading (Hague Rules), 8 per cent the Protocol to Amend the International Convention for the Unification of
Certain Rules of Law Relating to Bills of Lading (Hague-Visby Rules), and 77 per cent the Maritime Law of
China (PRC Maritime Law). It is submitted that the statistics reflect the status when the Chinese
cargo owners arranged for transportation, because when the companies did not arrange for
transportation, they could not answer the question about the transport contracts' application of laws.
When the Chinese cargo owners arranged for transportation, they preferred Chinese shipping
companies. This is a possible explanation as to why 77 per cent of the contracts adopted the PRC
Maritime Law.
B. Analysis of shipping arrangement in export trade
Article 5 of the Rotterdam Rules stipulates that the Convention shall apply to a contract for multimodal
transport as a whole as long as it contains an international sea carriage. Thus, once the cargo owners
agree to enter into a multimodal contract, the Rotterdam Rules will apply to the whole transport. In
this sense, the research group has designed a specific question concerning the mode of transport
adopted by the Chinese companies in international trade. Among the companies investigated, 38 per
cent of them replied that they adopted railway transport, 54 per cent replied for road transport, 85 per
cent for maritime transport, 62 per cent for air transport, and 46 per cent for multimodal transport.
Among the companies which adopted maritime transport, 85 per cent of which has chosen liner
shipping, 46 per cent voyage charter, 8 per cent time charter, and 8 per cent bareboat charter. We
95
The table is available at the website of the US-China Business Council:
https://www.uschina.org/statistics/tradetable.html.

Issue Ten May 2018
find that: maritime transport account for a major proportion; liner shipping account for a major
proportion in maritime transport; multimodal also account for a large proportion. The Rotterdam Rules
cover both liner shipping and multimodal transport, and should it becomes applicable, the
Convention will affect Chinese cargo owners' foreign trade transportation.
Out of the top twenty harbours enjoying the world's biggest container output in 2010, almost half of
them are located in China.96
It was found that container cargo accounts for a large proportion of the
overall foreign-trade cargo, especially in the trade between China and its large trade partners. Thus,
the Rotterdam Rules will have a significant effect on China. In the investigation into the claims in
multimodal transport claims of the past, 85 per cent of cargo owners lay claims against multimodal
transport operator for damage, cargo shortage and delivery delay, while 8 per cent of them turn to the
actual carriers who are in charge of each specific section of transportation to claim for compensation.
The result indicates that multimodal transport operators are the major targets of such claims. The
Rotterdam Rules' provision of 'door-to-door' liability conforms to the practice in this area.
C. Chinese cargo owner companies' responses to the Rotterdam Rules
1. Response to shippers' obligations
The overall investigation indicates that shippers are negative towards their obligations to carriers.
i. Shippers' obligation to provide information
Article 29 stipulates shippers' obligation of providing information, instructions and documents. If the
public authorities have other requirements, shippers shall provide relevant information upon the
request of carriers, so that the carriers can fulfil their statutory obligations. Article 31 requires
shippers to provide the accurate information needed for the compilation of contract particulars and
the issuance of transport documents. If the shippers fail, and it causes damage to the carriers or any
third parties, then shippers are presumed to be at fault. This liability can be exempted only when the
shippers can prove that they are not in default. The investigation shows that 63 per cent of the cargo
owners think that the Rotterdam Rules increases the shippers' obligations, while 48 per cent of them
think that the shippers' burden of proof has been increased as well. These results show that most of
the cargo owners do not approve of this new rule, and would like to maintain the status quo.
ii. Special rules on dangerous goods
Article 1 of the Rotterdam Rules does not provide a clear definition of 'dangerous goods'. Rather, the
Convention describes 'dangerous goods' as 'goods by their nature or character are, or reasonabl1y2
appear likely to become, a danger to persons, property or the environment'.97
Comparing with the
Hague-Visby Rules, the Hamburg Rules and the PRC Maritime Law, 98
the Rotterdam Rules extends the
96
Ministry of Transport of the People's Republic of China, The Report on China's Shipping Development2010
(China Communications Press, 2011), p 155
97
Article 32 of the Rotterdam Rules.
98
Article 68 of the Maritime Law, in its pertinent part, reads, 'At the time of shipment of dangerous
goods, the shipper shall, in com-pliance with the regulations governing the carriage of such goods, have
them properly packed, distinctly marked and labeled and notify the carrier in writing of their proper
description, nature and the precautions to be taken. In case the shipper fails to notify the carrier or
notifies him inaccurately, the carrier may have such goods landed, destroyed or rendered innocuous when
and where circumstances so require, without compensation|'.

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