In Re the Arbitration Between Trans Chemical Ltd. & China National MacHiney Import & Export Corp.

MEMORANDUM AND ORDER

This consolidated action involves efforts by the successful party in an arbitration to enforce the award in the face of challenges by the unsuccessful party to the court’s jurisdiction and the validity of the arbitration award.

I. Background

In 1987 two United States citizens, Dr. Shardar Khan and Dr. Mohammed Halipoto, both emigrants from Pakistan, decided to build the first hydrogen peroxide plant in Pakistan. They contacted a number of companies who might actually build the plant. One of the companies was China National Machinery Import and Export Corporation (“CNMC”). In September of 1987, when it became apparent that an agreement might be reached, Drs. Khan and Halipoto formed Trans Chemical Limited (“TCL”), a Pakistani corporation, and the subsidiary of United International (“UI”), an American corporation owned by the doctors. 1 CNMC engaged N.E.M., Inc., as its agent in the United States to negotiate with TCL. On December 22,1987, after weeks of negotiation, TCL and CNMC signed a contract in which TCL *272 agreed to purchase and CNMC agreed to sell a complete hydrogen peroxide plant and related technical services. 2 The 1987 contract was amended in December of 1988. 3 Both the original and amended contracts provided for binding arbitration of disputes between the parties in Houston, Texas, in accordance with the procedures of the American Arbitration Association (“AAA”). 4

Disputes between the parties soon arose. TCL claimed that CNMC had failed or refused to provide the goods and services required under the contracts and that CNMC had made material misrepresentations in connection with the sale, construction, and operation of the hydrogen peroxide plant. CNMC claimed breach of contract, fraud in the inducement, and trade libel. 5 Pursuant to the arbitration clause in the contracts the parties submitted their disputes to arbitration conducted by the AAA in Houston. A panel of three arbitrators heard evidence from June 21, to July 10, 1995. On August 15, 1995, the Panel awarded TCL $9,447,-563.62. 6

A. Civil Action No. H-95-4114

On the day of the award TCL filed an original Petition to Confirm Arbitration Award in this court, alleging subject matter jurisdiction under the Foreign Sovereign Immunities Act (“FSIA”), 28 U.S.C. §§ 1330, 1605. TCL later amended its petition to also seek enforcement of the award under the Federal Arbitration Act (“FAA”), 9 U.S.C. § 9; the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention” or “Convention”), and its implementing legislation, 9 U.S.C. § 207; and the Texas General Arbitration Act (“TGAA”), Tex.Rev.Civ. Stat. Ann. art. 236. 7 CNMC filed a Motion to Dismiss TCL’s Amended Petition to Confirm Arbitration Award and a Motion to Vacate Arbitration Award, Subject to the Motion to Dismiss. 8

At a January 26, 1996, hearing the court ruled that additional discovery was appropriate regarding TCL’s failure to produce a feasibility study about hydrogen peroxide production in Pakistan until the morning of the arbitration. 9 The court also ordered further briefing and discovery addressing the court’s subject matter jurisdiction. The parties filed supplemental briefs on these issues and also filed various objections to each other’s filings, which the court denied. 10 TCL also filed a Motion for Sanctions. 11

Pending before the court in Civil Action No. H-95-4114 are TCL’s Amended Petition to Confirm Arbitration Award, Motion for Order Confirming Arbitration Award and for Entry of Judgment, and Motion for Sanctions and CNMC’s Motion to Dismiss TCL’s Amended Petition to Confirm Arbitration Award, Motion to Vacate Arbitration Award, and Motion to Continue Discovery.

B. Civil Action No. H-95-5553

On October 20, 1988, Dr. Halipoto and his wife, Zareen Halipoto, filed a Voluntary Petition for Bankruptcy under Chapter 11 in the Bankruptcy Court for the Southern District of Texas. 12 On June 1, 1995, as the date for arbitration approached, CNMC filed an adversary proceeding in the Halipoto bankrupt *273 cy case. 13 CNMC sought a declaration that (1) the arbitration involved property of the Halipoto bankruptcy estate, (2) TCL/UI, Dr. Halipoto, and/or Dr. Khan exercised unauthorized control over such property of the bankruptcy estate, and (3) the arbitration clause in the 1988 contract was obtained by fraud or fraud in the inducement because of the pending bankruptcy and was therefore void or voidable.

On June 9,1995, CNMC filed an Emergency Motion for Temporary Restraining Order with the bankruptcy court alleging that the pending arbitration set for June 21, 1995, was stayed by the bankruptcy petition and requesting a TRO to prevent the arbitration from proceeding as scheduled. 14 At a hearing held the same day Bankruptcy Judge Karen Brown denied the request for a TRO. 15 On June 14, 1995, the Bankruptcy Trustee filed an Answer to CNMC’s Complaint 16 and an Emergency Motion for TRO seeking the same relief sought earlier by CNMC. 17 On June 15, 1995, Judge Brown again denied the motion. 18 On September 21, 1995, the Trustee and TCL filed a Joint Motion to Withdraw Reference in the adversary proceeding, 19 which was granted on December 8, 1995. 20 The case as assigned Civil Action No. H-95-5553 21 and was consolidated with Civil Action No. H-95-4114. 22

Pending before the court in the adversary action are TCL’s Motion for Sanctions Against CNMC and its Counsel, 23 CNMC’s Motion to Dismiss the Trustee’s Claim for Confirmation of the Arbitration Award, 24 CNMC’s Motion to Reconsider and Vacate Order Entered September 22, 1995, 25 the Motion to Dismiss of the Khans filed on September 15, 1995, 26 the Motion to Dismiss of United International filed on September 18, 1995, 27 CNMC’s Motion to Dismiss TCL’s First Amended Cross-Claim, 28 CNMC’s Motion to Vacate Arbitration Award, 29 CNMC’s Motion to Extend Scheduling Deadlines, 30 and CNMC’s Objections and Motion to Strike TCL’s Evidence. 31

C. Civil Action No. H-96-0166

On November 13, 1995, while Civil Action No. H-95-4114 was pending, CNMC filed an *274 Original Petition to Vacate Arbitration Award in the 190th District Court of Harris County, Texas, seeking vacatur under the TGAA, the FAA, and the New York Convention. 32 TCL removed the case to federal court pursuant to 28 U.S.C. § 1441(b), alleging federal subject matter jurisdiction over CNMC’s claims under the FAA and the New York Convention, and CNMC filed a Motion to Remand. The case was consolidated with Civil Action No. H-95-4114. 33 Pending before the court in the removed action are CNMC’s Original Petition to Vacate Arbitration Award 34 and CNMC’s Motion to Remand. 35

II. Subject Matter Jurisdiction

Because the court cannot address the merits of this case unless it has subject matter jurisdiction, the court must first address CNMC’s jurisdictional challenges in Civil Action No. H-95-4114. See Moran v. Kingdom of Saudi Arabia, 27 F.3d 169, 172 (5th Cir.1994). TCL alleges that the court has jurisdiction to confirm the arbitration award: (1) under the FSIA because CNMC is an “agency or instrumentality of a foreign state” and is subject to the Act’s exceptions to sovereign immunity; (2) under the New York Convention; and (3) under federal bankruptcy law. CNMC responds that the court should dismiss this action for lack of jurisdiction because (1) it is not an agency or instrumentality of a foreign state within the meaning of the FSIA; (2) the New York Convention does not provide for enforcement of an arbitral award rendered in the United States under American arbitration rules; and (3) CNMC dismissed the bankruptcy action before service by an adverse party of a responsive pleading, or alternatively, the adversary action should be dismissed since the arbitration claims predominate over the ownership claims.

A. Standard of Review

Federal courts are courts of limited jurisdiction and possess power only over cases authorized by the Constitution and laws of the United States. Coury v. Prot, 85 F.3d 244, 248 (5th Cir.1996). The burden of establishing jurisdiction rests with the party alleging it. Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 376-78, 114 S.Ct. 1673, 1675, 128 L.Ed.2d 391 (1994). In ruling on a motion to dismiss for lack of subject matter jurisdiction the court may evaluate (1) the complaint alone, (2) the complaint supplemented by undisputed facts evidenced in the record, or (3) the complaint supplemented by undisputed facts plus the court’s resolution of disputed facts. Williamson v. Tucker, 645 F.2d 404, 413 (5th Cir.), cert. denied, 454 U.S. 897, 102 S.Ct. 396, 70 L.Ed.2d 212 (1981); Barrerca-Montenegro v. United States, 74 F.3d 657, 659 (5th Cir.1996).

In this case the court will use the third approach. In doing so the “court is given the authority to resolve factual disputes, along with the discretion to devise a method for making a determination with regard to the jurisdictional issue.” Moran, 27 F.3d at 172. When the court bases its decision on its resolution of disputed facts it must give the plaintiff an opportunity for discovery and a hearing that is appropriate to the nature of the motion to dismiss. McAllister v. FDIC, 87 F.3d 762, 766 (5th Cir.1996); Delgado v. Shell Oil Co., 890 F.Supp. 1315, 1322 (S.D.Tex.1995). The court’s authority to consider evidence beyond the complaint allows it to devise a procedure that may include permitting affidavits, allowing further discovery, hearing oral testimony, and conducting an evidentiary hearing, all limited to deciding the jurisdictional issue. Moran, 27 F.3d at 172. See also Cowry, 85 F.3d at 248. To evaluate CNMC’s status as an agency or instrumentality of the People’s Republic of China the court has fashioned a comprehensive discovery plan permitting affidavits, reports, deposition testimony, and extensive briefing on Chinese law and CNMC’s status under that law. Although the court may consider oral as well as written evidence, an *275 evidentiary hearing is not required. In light of the extensive discovery and briefing on the jurisdictional issues, an evidentiary hearing is unnecessary in this case.

In determining Chinese law the court is not bound by the evidence presented by the parties or by the Federal Rules of Evidence. Pursuant to Fed.R.Civ.P. 44.1 “[t]he court, in determining foreign law, may consider any relevant material or source, including testimony, whether or not submitted by a party or admissible under the Federal Rules of Evidence. The court’s determination shall be treated as a ruling on a question of law.”

Rule [44.1] permits the court to consider any material that is relevant to a foreign-law issue, whether submitted by counsel or unearthed by the court’s own research, and without regard to its admissibility under the rules of evidence.

❖ * * * *

Since the new Rule dissipates former inhibitions, the court may consider any material the parties wish to present. Statutes, administrative material, and judicial decisions can be established most easily by introducing an official or authenticated copy of the applicable provisions or court reports supported by expert testimony as to their meaning ... In addition to primary materials and expert testimony, a litigant may present any other information concerning foreign law he believes will further his cause, including secondary sources such as texts, learned journals, and a wide variety of unauthenticated documents relating to foreign law.

Arthur R. Miller, “Federal Rule 44.1 and the ‘Fact’ Approach to Determining Foreign Law: Death Knell for a Die-Hard Doctrine,” 65 Mich. L.R. 613, 656-57 (1967) (footnotes omitted). See also Atwood Turnkey Drilling v. Petroleo Brasileiro, S.A., 875 F.2d 1174, 1176 (5th Cir.1989), cert. denied, 493 U.S. 1075, 110 S.Ct. 1124, 107 L.Ed.2d 1030 (1990); Republic of Turkey v. OKS Partners, 146 F.R.D. 24, 27 (D.Mass.1993).

Under Rule 44.1 expert testimony accompanied by extracts from foreign legal material is the basic method by which foreign law is determined. See Republic of Turkey, 146 F.R.D. at 27 (citing cases); 9 C. Wright & A. Miller, Fed. Prac. & Proc. § 2444, at p. 646. An expert witness on foreign law is not required to meet any special qualifications and need not be admitted to practice in the country whose law is at issue. See 9 C. Wright & A. Miller, supra, at p. 646. Differences of opinion among experts on the content, applicability, or interpretation of foreign law do not create a genuine issue as to any material fact under Rule 56. Banco de Credito Indus., S.A. v. Tesoreria General, 990 F.2d 827, 838 (5th Cir.1993), cert. denied, 510 U.S. 1071, 114 S.Ct. 877, 127 L.Ed.2d 73 (1994); John R. Brown, “44.1 Ways to Prove Foreign Law,” 9 Mar. Law. 179, 194 (1984).

Although expert testimony is the most common way to determine foreign law, it is no longer “an invariable necessity in-establishing foreign law, and indeed, federal judges may reject even the uncontradieted conclusions of an expert witness and reach their own decisions on the basis of independent examination of foreign legal authorities.” Curtis v. Beatrice Foods Co., 481 F.Supp. 1275, 1285 (S.D.N.Y.), aff'd mem., 633 F.2d 203 (2d Cir.1980) (citing Pollack, “Proof of Foreign Law,” 26 Am. J. of Comparative L. 470, 474 (1978) (listing authorities)). The Advisory Committee Notes to Rule 44.1 state that the Rule

provides that in determining [foreign] law the court is not limited by material presented by the parties; it may engage in its own research and consider any relevant material thus found. The court may have at its disposal better foreign law materials than counsel have presented, or may wish to reexamine and amplify material that has been presented by counsel in partisan fashion or in insufficient detail. On the other hand, the court is free to insist on a complete presentation by counsel.

Rule 44.1, Advisory Committee Notes. See also 9 C. Wright & A. Miller, supra, at p. 646. In making its determination of foreign law the court may rely on foreign case law decisions, treatises, and learned articles, even if they are not generally admissible under *276 the Federal Rules of Evidence. Republic of Turkey, 146 F.R.D. at 27 (citing cases). 36

B. Jurisdiction Under the Foreign Sovereign Immunities Act

The FSIA is an enigmatic legislative creation, described by the Fifth Circuit as “ ‘remarkably obtuse’ ” and a “ ‘statutory labyrinth that, owing to the numerous interpretive questions engendered by its bizarre provisions, has during its brief lifetime been a financial boon for the private bar but a constant bane of the federal judiciary.’” Callejo v. Bancomer, S.A., 764 F.2d 1101, 1107 (5th Cir.1985) (quoting Gibbons v. Udaras na Gaeltachta, 549 F.Supp. 1094, 1105, 1106 (S.D.N.Y.1982)). This case underscores the accuracy of the Fifth Circuit’s lament.

The FSIA provides that “[sjubjeet to existing international agreements to which the United States [was] a party at the time of the enactment of this Act a foreign state shall be immune from the jurisdiction of the courts of the United States and of the States except as provided in sections 1605 to 1607 of this chapter.” 28 U.S.C. § 1604. Under 28 U.S.C. § 1330(a) “[t]he district courts shall have original jurisdiction without regard to amount in controversy of any nonjury civil action against a foreign state as defined in section 1603(a) of this title as to any claim for relief in personam with respect to which the foreign state is not entitled to immunity under sections 1605-1607 of this title or under any applicable international agreement.” 28 U.S.C. § 1330(a). “Sections 1604 and 1330(a) work in tandem: § 1604 bars federal and state courts from exercising jurisdiction when a foreign state is entitled to immunity, and § 1330(a) confers jurisdiction on district courts to hear suits brought by United States citizens and by aliens when a foreign state is not entitled to immunity.” Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 434, 109 S.Ct. 683, 688, 102 L.Ed.2d 818 (1989) (emphasis in'original).

TCL alleges that CNMC is an “agency or instrumentality of a foreign state” within the meaning of the FSIA. 28 U.S.C. § 1603 provides a detailed definition of an “agency or instrumentality of a foreign state:”

(a) A “foreign state,” except as used in section 1608 of this title, includes a political subdivision of a foreign state or an agency or instrumentality of a foreign state as defined in subsection (b).

(b) An “agency or instrumentality of a foreign state” means any entity—

(1) which is a separate legal person, corporate or otherwise, and

(2) which is an organ of a foreign state or political subdivision thereof, or a majority of whose shares or other ownership interest is owned by a foreign state or political subdivision thereof, and

(3) which is neither a citizen of a State of the United States ... nor created under the laws of any third country.

TCL bears the burden of showing jurisdiction under the FSIA. 37

The parties do not dispute that CNMC satisfies the first and last elements of *277 § 1603(b). CNMC is a corporation organized under the laws of the People’s Republic of China (“China”) and is not a citizen of a State of the United States or created under the laws of a third country. 38 Their dispute focuses on the second element. CNMC argues that after its 1992 corporate reorganization it is no longer state-owned by the Chinese government as required by § 1603(b)(2). CNMC also argues that the court should require TCL to prove, pursuant to Edlow Int’l v. Nuklearna Elektrarna Krsko (NEK), 441 F.Supp. 827 (D.D.C.1977), 39 that CNMC discharges a governmental function or that the Chinese government exercises direct control over CNMC’s operations in a manner indicating that it owns a controlling interest in CNMC.

1. Is CNMC owned by China?

The parties argue that the court must first decide the proper date on which CNMC’s status as an agency or instrumentality of the Chinese government should be determined. Although the parties agree that the determination of whether CNMC is subject to the court’s jurisdiction under the FSIA should be based upon CNMC’s status at the time the act or acts complained of occurred, 40 they disagree as to that time. TCL argues that the acts complained of occurred in 1987 and 1988 when the contracts were entered and when CNMC was indisputably an agency or instrumentality of the Chinese government. CNMC responds that the act complained of occurred on August 15, 1995, when the arbitrators entered the award in favor of TCL, and a cause of action to confirm the award accrued. Alternatively, CNMC argues that the acts complained of occurred no earlier than August of 1993, the earliest date on which TCL argued during arbitration that its causes of action for breach of contract and *278 fraud accrued, and one year after CNMC reorganized in 1992. The court need not resolve this conflict, however, because the court concludes that CNMC was an agency or instrumentality of the Chinese government in 1987 and remained one through 1995.

a. CNMC’s arguments and evidence

CNMC admits that under Chinese law it is “owned by the whole people” of China and that before 1992 this meant that it was owned by the Chinese state. CNMC argues, however, that in 1992 in accordance with the 1988 Law of the People’s Republic of China on Industrial Enterprises Owned by the Whole People (the “Industrial Enterprises Law”), it was restructured into an enterprise whose ownership rights vest in CNMC and the “whole people of China” in a system of “social ownership” similar to that discussed in Edlow. 41 CNMC offers the testimony of Professor Rui Mu and Zhang Baolong in support of its interpretation of the relevant Chinese laws and regulations that control the relationship between CNMC and the Chinese government. 42

i. The testimony of Professor Rui Mu 43

Professor Rui states that from 1949 to 1979 concepts of property ownership in China were very simple. All property could be classified as government owned and controlled or privately owned and controlled. Beginning with the economic reforms of 1979, however, these distinctions became blurred. The economic reforms created a “new property ownership system based on management rights. In other words, property management rights in China are now the equivalent of property ownership rights in the United States.” 44 Article 71 of the Chinese Civil Law enacted in 1986 provides that “property ownership refers to rights of an owner, according to the law, to possess, use, reap benefit from and dispose of his own property.” There are four basic rights associated with property ownership in China: (1) possession, (2) use, (3) benefit, and (4) disposition. 45 Under Article 2 of the 1988 Industrial Enterprises Law, enterprises such as CNMC are granted three of the four property ownership rights created by Article 71 of the Civil Law. (“An enterprise shall enjoy the right to possess, use, and legally dispose of property which the state has authorized it to operate and manage.”) The remaining right, the right to benefit from the property, is “clearly dealt with” in Article 3 of the 1988 *279 Industrial Enterprises Law, which provides that “the primary task of an enterprise shall be to develop commodity production, create wealth, increase savings, and satisfy the ever-growing material and cultural needs of society, in accordance with state plans and market demands.” The right to benefit from property is “vested in the Chinese society, or, in other words, all of the people of China.” 46 Rui states that CNMC is entitled to the benefits of its business activities subject to its obligation to pay taxes and to meet certain minimum government requirements such as for funding workers’ benefits and for future development of the business through minimum levels of profit reinvestment. 47

In essence, the economic reforms in China have established a new system of property management rights, thereby effectively creating three broad types of property:

1. government property, which relates to property which is owned by the whole people but is managed and controlled by the government;

2. social property, which is owned by the whole people but is managed and controlled by private enterprise; and

3. private property, which is owned, managed, and controlled privately. 48

Because of “the historical context” government property and social property are often referred to as “state-owned” property. Rui concludes that industrial enterprises like CNMC are not state owned or controlled but, instead, are “socially owned” and privately controlled:

Thus,.at least from the Chinese perspective, “state-ownership” is tied to the fact that the property is ultimately owned by all of the people of China, and has no relationship whatsoever to who actually manages and controls (i.e., possesses, uses, and disposes of) that property for the benefit of its ultimate owners, the whole people of China. Therefore, the most accurate description of [CNMC], which is an organization operating consistent with the Industrial Enterprises Law that has absolute management rights over the property under its control, is that it is a socially owned organization, whose assets are neither government owned nor controlled. 49

According to Rui, this social ownership is analogous to the concept of social ownership discussed in Edlow, where property was being held in trust for the benefit of society but was otherwise owned and operated by a commercial entity. 50

In the final part of his report Professor Rui discusses numerous elements of the reformed Chinese laws that give industrial enterprises greater operational and managerial freedom to set prices, sell or purchase materials and goods related to any legitimate business activity, import and export goods and services, invest funds and manage their own bank accounts, consolidate and merge, contract with employees and with other legal persons (domestic and foreign), make loans and act as a guarantor, and declare bankruptcy. 51

ii. The testimony of Zhang Baolong

CNMC argues that it does not meet either of the two tests outlined in Edlow and offers Zhang Baolong as its primary witness on CNMC’s status under Edlow. Zhang, who is currently an in-house attorney for CNMC, 52 states that CNMC is not an organ of the Chinese government because it does not perform any strictly governmental function. 53 Zhang also states that the Chinese government does not exercise management control over CNMC. 54 Zhang explains that (1) CNMC is legally distinct from any national, state, or local government and receives no *280 subsidies from any government entity; (2) beneficial ownership of the enterprise vests in all the people of China; (3) CNMC’s is a profit-making business entity whose profits are reinvested in the company; (4) CNMC’s only payments to governmental entities are generally applicable corporate taxes; (5) CNMC’s only connection to the government is the requirement that it report various matters to the Ministry of Foreign Trade and Economic Cooperation; and (6) CNMC hopes soon to join other industrial enterprises that have made public securities offerings in recent years. 55

b. TCL’s arguments and evidence

TCL argues that CNMC is an agency or instrumentality of the Chinese government because it is wholly owned by the state. TCL offers the testimony and accompanying exhibits of Professor Donald C. Clarke and Minkang Gu in support of its position. 56

i. The testimony of Professor Donald C. Clarke 57

Professor Clarke states that CNMC is owned by the Chinese state. CNMC was founded in 1950 with funds invested by the state, and Clarke found no evidence that any non-state entity has made any equity investment in CNMC since its inception. In China investment confers ownership rights. “Consequently, the most realistic way to view [CNMC] is as a wholly-owned subsidiary of the Chinese state, the state being represented by the State Council delegating its power to the Ministry of Foreign Trade and Economic Cooperation (“MOFTEC”).” 58

Clarke states that CNMC’s claim that it is not owned by the state is not sustainable. CNMC concedes that its assets were owned by the government before the current economic reforms. According to Clarke, the argument that “ownership by the whole people” is somehow different from “state ownership” after 1988 has no basis in fact or in Chinese law or legal theory and lies in the realm of abstract political theory. Article 7 of the Chinese Constitution equates “ownership by the whole people” with “state ownership” when it speaks of “the state-owned economy, i.e., the economy under the socialist system of ownership by the whole people....” Article 5 of the 1994 PRC Regulations Governing the Supervision and Management of State-Owned Enterprises’ Property provides: “Enterprise property is owned by the whole people, that is, owned by the state.” Finally, Article 41 of the 1992 PRC Regulations on the Transformation of the Management System of Enterprises states: “The assets of the enterprise are under ownership by the whole people, i.e., ownership by the state. The State Council exercises the right of ownership over enterprise assets on behalf of the state.” The state is, therefore, declared to be the owner of industrial enterprises like CNMC; and the State Council, an identifiable government body, is declared to be the body that exercises the right of ownership on behalf of the state. 59

The Chinese state has broad ownership rights. Under Article 41 of the 1992 Regulations state-owned industrial enterprise assets include assets invested in the enterprise by the state in various forms and the return on those assets. Enterprise profits thus belong to the government, not to the enterprise itself. That the government allows some profits to remain in the enterprise in no way negates its claim to receive them at will. Article 42 of the 1992 Regulations makes it clear that governmental departments in *281 charge of an enterprise have the right to decide how enterprise profits shall be allocated between the government and the enterprise. 60

Clarke states that Professor Rui’s theory of “social ownership” of industrial enterprises is not supported by Chinese law. Article 3 of the Industrial Enterprises Law, where Professor Rui discovers his social ownership concept, is a weak basis on which to ground a theory of meaningful ownership by “society,” given the explicit legal declarations to the contrary. Furthermore, Clarke concludes that Professor Rui’s theory has no support in any legislative texts, Communist Party pronouncements, or even speculative academic articles. Legal theories about property are of immense importance in Marxist theory, and the absence of Professor Rui’s “social ownership” concept in Chinese legal thought is telling. 61

Clarke believes that his conclusion that “owned by the whole people” really means “state ownership” is also supported by examining whether the concrete rights held by state bodies over industrial enterprises and their management and assets resemble indicia of ownership. According to Clarke, a common index of ownership is “who gets paid if a state-owned enterprise is sold, merged, or liquidated.” Under Article 42(5) of the 1992 Regulations if CNMC were sold, merged, or liquidated, the government department in charge would take the assets, not CNMC’s employees or “society as a whole.” Furthermore, while the state devolves management power to industrial enterprise managers under the 1988 Industrial Enterprises Law and related regulations, it insists that important decisions be cleared with the governmental body in charge. Thus, Article 3(2) of the 1992 Regulations specifies that the purpose of the reforms of enterprise management systems is the protection of the state’s ownership of the enterprise’s assets. Article 15 of the Regulations delegates authority to enterprises to sell ordinary fixed assets, while retaining authority to control sales of major fixed assets. Income from these assets must be reinvested in the enterprise. Article 33 of the Regulations provides that if the enterprise experiences heavy losses in its business operations, it may apply to its government department for permission to cease production. 62

Clarke also states that Chinese governmental bodies continue to exercise a great deal of control over other aspects of industrial enterprises. The presence of a Communist Party cell in each enterprise, mandated by Article 5 of the 1992 Regulations, allows for Party control over the enterprise. MOF-TEC influences the selection of the enterprise manager through Communist Party channels and through its direct legal authority under Articles 42(6) and 44 of the Enterprises Law and Article 13 of the 1994 Regulations to appoint and remove the manager. Article 14 of the Procedures for the Registration and Management of State Asset Property Rights of Enterprises provides that if enterprise managers commit certain offenses, they are subject to “disciplinary” sanctions imposed by the government department in charge of the enterprise. “[T]he fact that enterprise managers can be ‘disciplined’ by a government department necessarily implies that they are administratively part of that department and subordinate to its leadership.” 63

Clarke concedes the correctness of statements in Professor Rui’s report and Mr. Zhang’s affidavit that CNMC has “separate legal status” and various associated characteristics. Clarke states, however, that an industrial enterprise’s

separate legal personality in no way prevents it from being owned by the state any more than it prevents it from being owned by any person. Thus, while it may be true, for example, that “[n]o laws or regulations permit a Chinese governmental entity to declare bankruptcy,” the point is that there is a law that permits state-owned entities to declare bankruptcy — the 1986 Enterprise Bankruptcy Law — so th[e] *282 fact that [CNMC] can in theory declare bankruptcy does not prove that it is not a state-owned entity. Similarly, the fact that the Chinese government is not obliged to make good on its debts, as pointed out by Professor Rui in his report, again shows nothing more than that [CNMC] is a limited liability company. I know of no reason why the Chinese state cannot own a limited liability company. 64

Clarke concludes that CNMC’s “status is not really complicated; it is analogous to a limited liability company with a sole shareholder, the state, which allows the managers a certain degree of independence — indeed, probably more independence than it has granted its managers since the founding of the People’s Republic of China — but nevertheless maintains, as it must, the right, inter alia, to change managers or discipline them for waste, as well as to decide on the allocation of the income stream and to benefit from the appreciation of the value of the enterprise.” The Chinese State is thus the owner both in fact and in law. 65

ii. The testimony of Minkang Gu 66

Gu states that there are three types of business ownership in China: (1) ownership by the whole people, (2) collective ownership, and (3) private ownership. The first two are considered to be the socialist public economy. Article 73 of the Civil Law states that “state property belongs to the whole people,” which means that the property is retained by the state. 67 Under Article 2 of the Industrial Enterprises Law the property of an industrial enterprise belongs to the whole people. The state, based on the principle of separating ownership rights and operation rights, only grants an enterprise the power to operate and manage the property. The property remains owned by the state. The relationship between CNMC and the state is, therefore, “somewhat like the relationship between agent and principal.” 68 The state treats state-owned property as “the material base of socialist public ownership and as the material base of the main source of state revenue,” and uses the property to “promote socialist construction and reformation and to improve the People’s material and cultur[al] life.” 69 Gu concludes that Professor Rui’s concept of “social property” is foreign to Chinese law. 70

CNMC’s goal of making a public securities offering in the future does not reflect a move towards privatization. Chinese leaders in charge of restructuring the economic system have made it clear that the development of the securities industry does not include the privatization of state-owned industrial enterprises. “In fact, China’s government through its various ministries, maintains a controlling share in new ventures, and thereby is able to continue its control over the economy and business operations in China,” and “regardless of how many shares [CNMC] may be allowed to sell to the public in the future, the State will remain the largest shareholder because it owns [CNMC’s] property.” 71

Gu concludes that the state will not turn over its property ownership to CNMC “as long as the Chinese government wants to maintain a ‘socialist public ownership economy’ as stated in its Constitution.” The 1992 reorganization of CNMC’s business structure in a manner consistent with the Industrial *283 Enterprises Law did not affect CNMC’s status as an agency or instrumentality of China because CNMC’s property is conferred by the state solely for operation and management, not ownership, purposes. 72

c. The court’s analysis

CNMC admits that even after its reorganization in a manner consistent with the 1988 Industrial Enterprises Law, it is still “owned by the whole people.” 73 CNMC argue