On October 25, the State Council held an executive meeting and announced significant reforms to China’s company registration system, aiming to lower the cost of starting a business and boost social investment. This marks another major legal reform following the 2005 Company Law revision. The goal is to further reduce government intervention, lower entry barriers, and encourage entrepreneurial activity. Two key changes were introduced: first, relaxing the minimum registered capital requirements for different types of companies. For example, limited liability companies now require a minimum of 30,000 RMB, one-person LLCs 100,000 RMB, and joint-stock companies 5 million RMB. Additionally, the initial capital contribution ratio and payment deadlines are no longer strictly regulated. The paid-in capital system has been replaced with a subscription-based model, reducing startup costs. Shareholders can now independently decide on capital contributions, methods, and timelines, while being responsible for their accuracy. Second, the annual inspection system has been replaced with an annual reporting system, increasing transparency and allowing public access to company information.
These reforms represent a revolutionary shift in China's corporate legal framework, especially in the "birth" process of companies. Since the introduction of the first Company Law in 1993, the legal capital system required full capital to be paid upfront, ensuring that company assets matched their registered capital. This rigid structure made it difficult for entrepreneurs to start businesses and stifled private investment. Over time, the system became outdated, limiting innovation and economic growth. The 2005 reform was a step forward, introducing more flexibility and reducing the minimum capital requirements. However, even after these changes, the thresholds remained too high for small and innovative enterprises.
The recent adjustments aim to address these shortcomings by lowering the capital threshold, making it easier for startups to enter the market. According to statistics, China has about 12 companies per 1,000 people, compared to over 50 in Japan and South Korea. This highlights the need for further reforms. By removing the minimum capital requirement, the government hopes to stimulate entrepreneurship and support the development of new industries. While some risks like false investments may arise, the overall benefits are seen as significant.
Another important change is the abolition of the annual inspection system, which was often criticized as a bureaucratic burden. Replacing it with a credit-based reporting system reflects a shift toward more transparent and efficient governance. This change not only reduces the administrative burden on businesses but also strengthens the relationship between the government and the market.
As economist Milton Friedman once noted, laws reflect underlying ideologies. A strong corporate legal system is crucial for a country’s competitiveness. Countries like the Cayman Islands have thrived due to their favorable legal environments. In this context, China’s reform signals a move toward a more dynamic and entrepreneur-friendly economy. It represents a meaningful institutional dividend, helping to build a more open and responsive market. For those who have long felt constrained by excessive regulation, this reform is a welcome and necessary step forward.
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