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As being the case, at the early stage of modern Chinese contract law legisla- tion, there was a strong preference to the implementation of the State plan. The major reason was the attempt to differentiate the kind of market economy

78 _{See Ding Bangkai, supra note 74 at p. 7.}

79 _{The “equal status” is provided as basic principle in both the GPCL and Contract Law.}

Article 3 of the GPCL provides that parties to a civil activity shall have equal status. Under Article 3 of the Contract Law, the parties to a contract shall have equal legal status and no party may impose its will on the other party.

80 _{See Hu Kangsheng, Explanation to the Contract Law (Draft) of the People’s Republic of}

China, published in Selection of Legislative Materials of Contract Law of the People’s Republic of China, See Sun Lihai, supra note 63 at pp. 3–7.

that China was supposed to adopt from the free market economy that existed in many west countries. It was believed that the contracts should become a useful tool to help implement the State plan because all business activities ought to be under the control of the State plan.

Thus, in 1981 Economic Contract Law, contracts were deemed to be sub- ject to the primacy of the State plan. Article 4 of the Economic Contract Law explicitly provided that making economic contracts should meet the require- ments of the State plan. And Article 7 further provided that an economic con- tract should be null and void if it violated the state plan. Clearly, under the 1981 Economic Contract Law, no contract may become obstacle to the State plan because a stated purpose of the 1981 Economic Contract Law was to ensure the implementation of the State plan.81

The State plan in China is normally divided into mandatory State plan and directory State plan (or State guidance plan). The mandatory State plan refers to the pan that must be carried on and it is the device that the state uses to directly manage the nation’s economy. Therefore, the mandatory State plan is being implemented through an “administrative order” of the state planning authority. The directory State plan serves as the guidance for the enterprises to conduct their businesses, and the enterprises are allowed to maintain certain flexibility to make their business plan according to their business need.

Generally, the state plan during the course of implementation is operated in the form of quota. In accordance with 1981 Economic Contract Law, for busi- ness transactions concerning products and items within the scope of mandatory State plan, the economic contracts must be made under the quota provided by the State. If the parties to an economic contract could not reach consent, the matter should be handled by their superior authority. If the business transac- tions involved the products or items falling into the category of the directory State plan, the economic contracts may be concluded according to the reality of the entities concerned with reference to the State quota.

When the Civil Code was adopted in 1986, an effort was made to separate contracts from State plan to the extent that parties are being given more power to make business decisions on their own. Despite the fact that the Civil Code prohibits any civil activity from undermining state economy plan, it does not require that contracts be made under the State plan. Accordingly, the 1981 Economic Contract Law was amended in 1993, and major changes were the elimination of preference to the state plan. In Article 1 of the amended Economic Contract Law, a stated purpose of the contract law was changed

from “ensuring the implementation of State plan” to “ensuring a sound devel- opment of the socialist market economy”.82

The Contract Law is said to have departed further from the planned economy tradition and to be more market oriented than previous contract legislation. First of all, the Contract Law further strengthens the principle of “equal status” by emphasizing that no party may impose its will on the other. The purpose underlining the “equal status” principle is to ensure that a contract is the result of the free will of the parties to the contract. Secondly, the Contract Law for the first time does no use the term “State plan” in the contract law legislation, and instead the term “State mandatory task or State purchase order” is used to refer to the State mandate in the making of contracts. Third, the Contract Law specifies the contracting party to include natural person, legal person, or other organization, and therefore marks an end of the preclusion of individuals (nat- ural person) from making contacts.83

Under Article 38 of the Contract Law, in case the State issues a mandatory task or a state purchasing order based on necessity, the relevant legal persons or other organizations shall conclude contracts between them in accordance with the rights and obligations as stipulated by the relevant laws and admin- istrative regulations. Article 38 is only the provision in the Contract Law where the state plan is addressed, and the contract concluded under Article 38 is also called “State mandatory task contract” or “State purchasing order con- tract”. What could be inferred from Article 38 is that in the socialist market economy that China is undertaking, the impact of the State plan on contracts still exists.

82 _{The 1981 Economic Contract Law of China was amended on September 2, 1993. An}

English translation of the Economic Contract Law (1993) is available at http://www.qip.net/chinalaw/prclaw19.htm.

83 _{In 1981 Economic Contact Law, the contract was defined as an agreement determining}

mutual relationship of rights and obligations between the legal persons in order to realize certain economic goals. In 1993 when the Economic Contract Law was amended, it was provided that the Economic Contract Law applies to contracts entered between legal per- sons who are equal civil parties, other economic organizations, self-employed workers or traders and rural households operating on contract for the purpose of realizing certain eco- nomic goals and clarifying each other’s rights and obligations. It was clear that under the Economic Contract Law, natural person were not eligible for being the parties to a contract. See id. Although the Technology Contract Law that was adopted in 1987 applied to con- tracts made between legal persons, between legal persons and citizens, and between citi- zens, which establish civil rights and obligations in technical development, technology transfer, technical consultancy and technical service, it excluded the contracts in which one party is a foreign enterprise, other foreign organization or foreign individuals. An English translation is available at http://www.qip.net/chinalaw/prclaw21.htm.

However, it should be noted that with the development of the market econ- omy, the State plan seems to be playing less and less active role in China.84

An important aspect is that the State has been shifting its planning authority from the micro control to the macro control of the nation’s economy, and has been relying more on economic and legal means to manage the economy. In contract area, the much of the focus of the State has been on the State owned or controlled enterprises.85_{Under Article 38, the “State mandatory task con-}

tract” or “State purchasing order contract” only applies to “relevant legal per- sons or other organizations”. Most of such relevant legal persons are the State owned or controlled enterprises.

84 _{For example, the number of the state-owned or controlled enterprises has been declining}

over the years. In 1998, the state-owned or controlled enterprises were 238,000. By the end of 2003, the number decreased to about 150,000. As of October 2004, the state owned industrial enterprises were 31,500, only about 15% of total industrial enterprises in the country. See the State-owned Assets Supervision and Administration Commission of the State Council, available at http://www.sasac.gov.cn/gzjg/qygg/200412010040.htm. Take Beijing for example, by July 2005, of a total of 1,015,751 enterprises in the area of Beijing, some 819505 are private or individually owned enterprises. See Economy Daily, September 15, 2005 at page 9. Also in Liaoning Province, foreign investors are now allowed to take full control of all State-owned enterprises in the province except coal mine industries. See China Daily, September 16, 2005, at page 1.

85 _{State controlled enterprises are referred to these publicly held companies where the State}

owns majority shares. Under the Company Law of China (adopted December 29, 1993, effective July 1, 1994 and amended December 25, 1999), the companies in China take two different forms: company with limited liability and company limited by shares (or stock company). A State own enterprise may be structured as a limited liability company (wholly State owned) or a company limited by share. In the latter case, the State is a shareholder in the company.