Opinion: Why Local Enforcement Overreach Is Such a Threat to the Private Sector

Efforts by some local governments in China to exploit law enforcement by targeting private companies beyond their jurisdictions have raised significant concerns. This practice, known as "distant water fishing," involves local authorities seeking cases of alleged wrongdoing against companies located in other regions to avoid pressuring businesses within their own jurisdiction. The aim is to impose hefty fines and confiscate substantial assets to supplement government income, often at the expense of legal boundaries and business fairness [para. 1][para. 4].

On October 8, the head of China’s top economic planner emphasized that unauthorized and profit-driven enforcement actions are not allowed. The government plans to regulate administrative law enforcement more strictly, promoting inclusive and careful regulatory approaches. This follows a meeting of the Communist Party’s Central Committee on September 26, which pledged to help businesses overcome challenges and standardize enforcement actions related to enterprises. These declarations reflect a clear stance against arbitrary and profit-driven enforcement activities [para. 2][para. 3].

The central government has been advocating for years to curb profit-oriented law enforcement. The public security ministry issued the Seven Provisions on Prohibiting Profit-Driven Law Enforcement by Public Security Organs in 2021. Despite these efforts, arbitrary fines and unnecessary inspections persist largely due to weak control and oversight [para. 5][para. 6].

This practice has serious implications, undermining attempts to improve the business environment in China. It threatens personal freedoms, financial security of entrepreneurs, and disrupts business operations, while also damaging confidence globally. Regions with favorable business environments might enact defensive measures to protect local enterprises, leading to resources being wasted. It dissuades the creation of a unified national market and impacts China’s international competitiveness, especially as Southeast Asian countries improve their business rankings [para. 7][para. 8].

Resolving these issues requires strengthening legal frameworks and mechanisms to prevent law enforcement power from straying beyond legal limits. Legal expertise argues that the rule of law should not be compromised due to financial strains or narrow departmental interests. The draft Private Economy Promotion Law aims to provide clearer guidelines on enforcement, ensuring that actions are minimally invasive to normal business operations, emphasizing legality in asset seizures, and distinguishing between illegal gains and legitimate assets [para. 9][para. 10].

Leadership's firm stance against these practices is notable, yet many questions remain regarding responsible agencies and objectives. Successful rectification will require coordination among supervisory bodies and sincere cooperation across local governments. It poses a challenge as these systems must begin thinking in terms of collective benefit and focus on larger structural integrations and legal reinforcement [para. 11].

It is critical that while advocating for standardized enforcement, companies, especially private firms, are not placed beyond scrutiny. Businesses must strengthen their compliance to ensure legality and fairness. Institutional integrity plays a key role in China's economic progress; therefore, fostering inclusive institutions based on property protection, fair competition, and the spirit of contracts is essential to enhance society-wide prosperity. Predatory practices should be curbed as they benefit a narrow few at the expense of many. Advancing regulatory actions in a standardized manner aligns with nurturing inclusive institutions, crucial for maintaining China's exceptional economic trajectory since the reform era [para. 12][para. 16].

For further details, contact editor Michael Bellart (michaelbellart@caixin.com) [para. 18].