Boosting growth through strengthening investor and creditor protection in China: How China can learn from the UK experience

Lead Research Organisation: University of Leeds
Department Name: Law

Abstract

This application demonstrates that the quality of legal institutions can matter for economic development and that important policy lessons can be learned by China from the UK in this regard. This application recognises that China has been a remarkable economic success story but the country also faces new challenges as its economy enters a more mature phase. In particular, it needs to avoid the 'middle income trap' i.e. where a country has costs that are now too high to compete with low-income countries but where productivity does not match those in high-income countries.
There are economies in Asia including Singapore and Hong Kong SAR that have emerged successfully from middle income status. Both these economies are built on UK law and are renowned for the quality of their legal infrastructure in supporting development of the financial system. The application suggests how China might also benefit from the UK experience in building its legal infrastructure. But the application recognises China's singular journey and avoids simplistic conclusions that certain consequences will inevitably follow form certain formal changes. It recognises the need for a continuous process of adaptation and development; learning appropriately from experience and responding sensitively to local conditions. The application demonstrates in particular how legal reforms can support economic growth through
- enhancing the protections available to minority investors
- supporting the availability of credit and contributing to lower-cost credit
- supporting the restructuring of ailing businesses.

In these areas we seek to provide options for enhancing and reforming the legal and financial system in China that are based upon the UK and other experience. We acknowledge that there are choices to be made between means and ends and that the relationship between means and ends is contingent and uncertain.
The data we rely on will come principally from the World Bank Doing Business (DB) reports and rankings which are grounded on the notion that smarter business regulation promotes economic growth.
The DB rankings have been issued annually since 2004 and the 2016 rankings includes 11 sets of indicators for 189 economies. Each economy is ranked on the individual indicators and also in an overall table. Currently, the UK is 6th in this table and China 84th but Singapore is 1st and Hong SAR is 5th which shows that it is possible for Asian economies to rank highly.
In our project, we will explore deep into the detail underlying the Protecting Minority Investors, Getting credit and Resolving Insolvency indicators. These 3 indicators appear particularly pertinent to the development of a mature financial system and in relation to them all China ranks far below the UK. On protecting investors, China is ranked as 134th whereas the UK is 4th. We show how the gap can be bridged and how China can learn from the UK experience by examining critically how the UK has protected minority investors and ascertaining what measures of protection might work most effectively in Chinese conditions.
Our approach takes the relevant DB rankings as a guide but subjects them to critical scrutiny and engaging systematically with the methodology underpinning the rankings; addressing the robustness of this methodology and considering alternative approaches. For instance, we will test the robustness and limitations of the DB 'resolving insolvency' data on China using Jiande Municipal People's Court in Zhejiang Province as a case study. This makes the process of data collection and analysis more manageable. 20 interviews with creditors and practitioners will be undertaken in Zhejiang Province and data on business closures from the local branches of the China Business Registration Authorities and the China Pension Management Authorities will also be collected.
We will also use econometric analyses based on detailed micro data from other data sources

Planned Impact

The project aims to influence policy-makers, and guide investors, companies and practitioners on the legal reforms necessary to provide China with a more competitive financial and legal system with increased opportunities for all. it will highlight in particular the reforms that are needed in respect of enhancing the protections available to minority investors; supporting the availability of credit including lower-cost credit; and facilitating the restructuring of ailing businesses. It also aims to influence the World Bank in reviewing its Doing Business data. The project will do this by leveraging the combined and complementary disciplinary and cross country strengths of the Centre for Business Law and Practice (CBLP) at the School of Law, University of Leeds and the Management department at the University of Wuhan. It will utilise their different networks and bring these together to promote the development of innovative new policy ideas and to facilitate policy formation. We set out below these specific policy impacts

1. Policy-Makers/Regulators/Government
A strong Chinese financial and legal system is essential not only for a strong Chinese economy but also, given the size of China's economy, for a sound global economy. Weaknesses in the system can erode trust, discourage investment, including inward investment into China. Chinese investment into the UK may also be impacted if weaknesses in the financial and legal system impact on the Chinese economy. By examining whether there are measures that may enhance the protections available to minority investors, support the availability of credit and lower-cost credit and support the restructuring of ailing businesses, the project will assist Chinese policy-makers in designing measures that may address these objectives. It also aims to assist Hong Kong and international regulators in better understanding and assessing the risks and benefits posed by Chinese companies for investors.
2. The World Bank
The study includes a visit to the World Bank and will assist it in assessing the reliability of its Doing Business data in relation to China and where necessary adjusting this information. This will in turn assist those who rely on such data for investment and policy decisions.
3. Investors-Shareholders and Creditors
The project will assist investors both outside and within China, such as the China Investment Corporation who are seeking to make investment decisions in Chinese companies, by providing them with a more detailed understanding of the risks involved and the protections available and any reforms they may wish to press for.
4. Companies
The project will benefit Chinese companies seeking to attract investment by providing them with data on the perceived weaknesses, if any, of the Chinese financial and legal system and provide data on what private measures that they be able to take to address these and attract investment.
5. Professional and Practitioner Groups
The project will inform the practice of practitioners regarding the likely outcomes of litigating on behalf of minority shareholders and creditors and what reforms may be required. This may result in strengthening of protection for investors insofar as it facilitates more successful or effective litigation.

The above groups will be reached in the following ways:
Groups 1 and 2: Targeted briefing papers, invitation to participate at conferences, workshops, visits to key policy-makers to present research. Their feedback will be sought on design of project as it progresses and they will be briefed on progress. The Final report will be directly disseminated to them.
Groups 3-5: Invitation to conferences, workshops at which social media communications will be flagged up, dissemination through the partner networks. Their feedback and views will be sought eg through comments on blogs, email and in person.

Advisory Board and policy makers will be contacted regularly for feedback on project findings.

Publications

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Keay Andrew (2018) Transforming Corporate Governance in Chinese Corporations: A Journey, Not a Destination in NORTHWESTERN JOURNAL OF INTERNATIONAL LAW & BUSINESS

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McCormack, G. (2018) 'Why 'Doing Business' with the World Bank May Be Bad for You' in European Business Organisation Law Review

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McCormack, G. (2018) Criticising the Quest for Global Insolvency Standards in KLRI Journal of Law and Legislation

 
Description This research aims to show, on the basis of the UK experience, World Bank data and other international benchmarks, how a sound financial system fosters economic growth and what part legal institutions can play in facilitating a sound financial system. It addresses in particular how growth can be sustained through legal reforms that will: • enhance the protections available to minority investors • support the availability of credit and contributing to lower-cost credit • support the restructuring of ailing businesses. The research is likely to be of great relevance to practitioners and policy makers working in the field. It should also be of great benefit to academics in the fields of law and regulation, law and development, capital market studies and business and finance more generally as well as to China specialists.
The World Bank 'Doing Business' report has produced rankings which are grounded on the notion that smarter business regulation promotes economic growth. The DB rankings have been issued annually since 2004 and the 2016 rankings includes 11 sets of indicators for 189 economies. Each economy is ranked on the individual indicators and also in an overall table. • The UK is ranked 6th and China 84th in the 'Doing Business' report • Singapore is 1st and Hong SAR is 5th; these Asian economies have built on UK law and are renowned for the quality of their legal infrastructure in supporting development of the financial system • China might also benefit from the UK experience in building its legal infrastructure.
The data we rely on will come principally from the World Bank Doing Business (DB) reports and rankings. We will focus on 3 indicators that are particularly pertinent to the development of a mature financial system and in relation to them all China ranks far below the UK • Protecting Minority Investors • Getting credit • Resolving Insolvency Our approach takes the relevant DB rankings as a guide but subjects them to critical scrutiny and engaging systematically with the methodology underpinning the rankings; addressing the robustness of this methodology and considering alternative approaches. We will also use econometric analyses based on detailed micro data from other data sources. Thus far the research team has worked on all three of the indicators and come up with some interesting findings.
In terms of key Findings McCormack has highlighted some of the issues thrown up by the Doing Business (DB) project conducted on an annual basis by the World Bank
The role of law in promoting economic development has long been a controversial one. Certain legal systems may be conducive to higher rates of economic development but the necessary causal link between the two is difficult to establish. Nevertheless, the DB project and associated rankings has sparked the attention of politicians and policy makers across the globe. The DB project stresses the importance of a well-functioning legal and regulatory system in creating an effective market economy and, as a corollary, the deleterious effects that a poor regulatory environment can have on output, employment, investment, productivity, and living standards. The DB project has focused attention on law and development issues; its methodology is fairly transparent and it has produced data sets that are of great benefit to researchers. Nevertheless, the way in which the rankings are compiled encourages countries to 'game' the system. The rankings embody, explicitly or implicitly, a particular set of preferences, whose relationship with matters of economic development is at best uncertain. Moreover, the DB project largely, if not entirely, mirrors the law on the books which may not necessarily reflect what happens in practice in a particular country.
Our findings suggest that the DB project should not survive, at least in its present form, because of the theoretical and methodological deficiencies inherent in its conception and implementation. Our research digs down into the methodology of particular indicators such as 'Getting Credit' and 'Resolving Insolvency' and their relationship with a questionable set of normative assumptions.Another member of the research team, Zinian Zhang, has worked primarily on the 'resolving insolvency' indicator and in ccollecting and analysing empirical data from 2007-2011 in the relatively rich Zhejiang province region in Eastern China, Zhang has found that the vast majority of companies that became insolvent did not use - or could not access - formal insolvency procedures in Zhejiang. Indeed, the Zhejiang courts only handled a small proportion of corporate insolvencies compared with their counterparts in the UK and also the US.
A third member of the research team, Jingchen Zhao, has focused his attention primarily on a third World Bank 'Doing Business' indicator; namely the protection of minority investors.
Working with a set of empirical data, he has considered in particular the role of the derivative action in protecting minority investors (shareholders) and promoting sound corporate governance. The derivative action allows minority shareholders to sue on behalf of a company with a view to redressing wrongs done to the company such as unlawful profit taking by company controllers and their acting for largely personal gain rather than on behalf of the company.
The derivative action procedure has been introduced in China but Zhao has highlighted certain problems with its practical implementation. He has found that the vast majority of shareholders, including both individual and institutional shareholders have been hindered from bringing derivative actions by the shareholding threshold imposed by Chinese company law. Most of the derivative lawsuits to date have involved private companies and it is difficult for shareholders to invoke this action in public companies and especially in listed ones.
Current Chinese company law provides that shareholders in joint stock limited liability companies (JSLCs) who intend to bring derivative action are required to hold 1% or more of the company's shares for 180 consecutive days. Drawing on the empirical evidence, Zhao proposes a lower shareholding percentage requirement for listed companies that would enable a greater proportion of minority shareholders to use the derivative action regime.
Zhao has also examined the litigation costs structure in respect of derivative actions in China and the findings suggest that the current legal rules have discouraged shareholders from bringing derivative actions. Based on the costs regime in the UK as well as in the US and Japan, practical reform suggestions such as he use of contingency fees and fixed fees are advanced with a view to alleviating some of the difficulties in China.
Exploitation Route By policy makers and regulators in China
By adjusting the shareholding threshold requirement for the bringing of derivative actions in particular in relation to listed companies
And by reforming the litigation fee structure for derivative actions through the introduction of fixed fees and contingency fees
By the World Bank though removing the focus on rankings in the 'Doing Business' (DB) project. We develop this point below.
The detailed engagement with particular 'Doing Business' indicators in our research shows the advantages of providing options that are based upon experience rather than setting out answers. The question becomes not whether legal rules have been transplanted from one country to another but whether the legal institutions in a particular country as a whole function in such a way as to support rather than to obstruct economic growth. Addressing this question calls more for a process of continuous adjustment and learning from experience rather than a simple 'big bang' solution which the Doing Business set of indicators appears implicitly to endorse. While our research has highlighted flaws in some of the methodological implications underlying the process of data collection as well as possible inaccuracies, nevertheless the DB project remains a very valuable repository of statistical information and law and development assumptions. This repository may be quarried in the course of policy formation and for purposes of comparative political economy. But the DB project should be stripped of its preoccupation with rankings - the process of simplifying complex matters of policy execution and design into a simple, single ranking. Such reductionism pays scant regard to subtlety and nuance disrespecting the reality that various functions might be carried out under the framework of a legal rule in one country but through an extra-legal procedure in another country. Context and cultural sensitivity are all important in the 'real' world and reducing all sorts of complicated matters to a single ranking hardly seems compatible with bringing about genuine improvements in the legal architecture for doing business.
Sectors Financial Services, and Management Consultancy,Government, Democracy and Justice

 
Title Database of Chinese Shareholder litigation 
Description All cases have been collected via Bei Da Fa Bao (????) in relation to derivative actions and on oppression actions 
Type Of Material Database/Collection of data 
Year Produced 2017 
Provided To Others? No  
Impact This database provides an overview of shareholders' litigation and provides a basis for the empirical research. 
 
Description Chinese law joint project between the University of Leeds and Wuhan University 
Organisation Wuhan University
Country China 
Sector Academic/University 
PI Contribution The following academics from Leeds have worked on the project - Gerard McCormack, Jingchen Zhao, David (Roger) Halson, Joan Loughrey, Andrew Keay, Sarah Brown and Zinian Zhang. They will be supported by a research assistant who will work for 50% of the time on verification of methodological assumptions, data collection and analysis, research dissemination and impact generating activities. Gerard McCormack has overall responsibility for implementation of the project at the Leeds end. He has substantial experience in the leading and managing of multi-partner projects. He has also worked in Singapore and been a consultant for the government of the Hong Kong Special Administrative Region on the reform of their Companies Ordinance. Jingchen Zhao is responsible for liaison with the team at Wuhan. He is fluent in both Chinese and English and has developed close working relationships with Chinese based colleagues.
Collaborator Contribution The following academics from Wuhan have worked on the project - Professor Xian Huang (PI), Professor Min Pan, Professor Li Ma, Associate Professor Jun Xie, Associate Professor Ting Hu, Assistant Professor Yan Liu, Assistant Professor Jingwen Yu. They will be supported by six Research Assistants who will benefit from the investigators' combined expertise and experience. Xian Huang has overall responsibility for implementation of the project at the Wuhan end and he has also substantial experience in the leading and managing of multi-partner projects. Yan Liu will be responsible for liaison with the team at Leeds. Educated in the US, he is fluent in both Chinese and English and has developed close working relationships with colleagues at Leeds.
Impact The partnership has already produced several reports and publications. The Wuhan side has also organized several workshops. A joint conference will take place in Leeds in April 2018.
Start Year 2017
 
Description Dr Zhang and Professor McCormack Gave Presentation in School of Law, University of Wuhan 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Postgraduate students
Results and Impact On 18th December 2018, Dr Zhang and Professor McCormack were invited by Wuhan University Law School to give a seminar on 17th December and were welcomed by Professors Yuan Kang and Li Anan, on behalf of the Dean of the Law School, Professor Feng Guo. That evening, Dr Zhang gave a presentation on his latest empirical studies of corporate bankruptcy law and discussed his empirical legal research approaches in investigating the gap between the law in the books and the law in action. Professor McCormack commented on the comparative legal studies. Around forty faculty members and PhD researchers from Wuhan University Law School join the seminar, and a productive discussion between Dr Zhang and the audience benefited both sides.
Year(s) Of Engagement Activity 2018
 
Description Dr. Zinian Zhang Presented at Hubei Provincial Lawyers Association 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact On Sunday 16th December 2018, Dr Zhang was invited by the Hubei Provincial Lawyers Association to give a seminar on corporate bankruptcy of China's listed companies, which was well attended by the practitioners from the city of Wuhan as well as from Beijing and Shanghai. Dr Zhang's exposure to local practitioners paves the way for the future fieldwork in Wuhan, a mega city in China, and the networking will strengthen his empirical studies.
Year(s) Of Engagement Activity 2018
 
Description Dr. Zinian Zhang Presented in Zhongnan University of Economics and Law 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Postgraduate students
Results and Impact In the evening of 15th December 2018, Dr Zhang visited Zhongnan University of Economics and Law, located in the same city Wuhan, to give a seminar.
At Zhongnan University, Dr Zhang was welcomed by the Dean of the Criminal Justice School, Professor Hu Xiangyang, who was a visiting professor at Leeds years ago. The evening seminar attracted some thirty participants, most of them PhD students from both the Zhongnan Law and Criminal Justice Schools. During the pre-seminar reception with Professors Hu Xiangyang and Zhou Ling, Dr Zhang informed the hosts of the existing academic collaboration between the Leeds Law School and the Zhongnan Law School, and Professor Hu expressed his interests that the Leeds cooperation with the Zhongnan Law School be expanded to his Criminal Justice School.
Year(s) Of Engagement Activity 2018
 
Description Dr. Zinian Zhang presented at at the European Empirical Legal Study Society annual conference 
Form Of Engagement Activity Participation in an activity, workshop or similar
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Schools
Results and Impact Dr. Zinian Zhang presented a paper on 'control in Chinese corporate reorganisations' at the European Empirical Legal Study Society annual conference held in the University of Leuven, Belgium in March 2018;
Year(s) Of Engagement Activity 2018
 
Description Dr. Zinian Zhang presented at the 2018 INSOL annual academic colloquium 
Form Of Engagement Activity A formal working group, expert panel or dialogue
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact Dr. Zinian Zhang presented a paper on 'China's cross border corporate reorganisations' at the 2018 INSOL annual academic colloquium in London;
Year(s) Of Engagement Activity 2018
 
Description Leeds -Wuhan Conference: Law and Economics in UK and China 
Form Of Engagement Activity A formal working group, expert panel or dialogue
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Schools
Results and Impact This conference is aimed at strengthening the collaboration between Wuhan and Leeds, setting plan for future conferences and explore the possibility of developing further interdisciplinary research. At the end of the conference, dates for another two conferences are agreed and members from both teams have changed views and expressed interest for conducting interdisciplinary research of law and finance.

Five speakers have given presentations at the conference and here is a summary of the main points:
[McCormack: Why 'Doing Business ' with the World Bank may be bad for you]
?Flaws in the Methodology of the WB DB report
?More consideration should be given to law in action

[Zhao: Shareholder litigation in China: empirical evidence]
?Derivative actions are impeded by the shareholding requirement and funding problem
?There is an increasing number of derivative actions, especially in most developed regions in China

[Brown: Provision of credit to the private individual: Protection and control]
?The UK regime for protecting 'credit' consumers
?The purpose of overindebtedness procedures: provide relief/rehabilitation for the debtor

[Zhang: Cross-Border Corporate Reorganizations in China]
?The China Enterprise Bankruptcy Law of 2006 Article 5
?Worldwide Effects of China Court Bankruptcy Rulings
?Foreign Bankruptcy Rulings Bind Assets in China subject to Recognition

[Chen: China Stock Market Regulations]
?Market reacts significantly and negatively to filings of lawsuits.
?Market reaction to adjudication of lawsuits is not significant.
?Informed investors are more pessimistic on suitcases in different locations.

[Liu Yan: Leeds-WHU Joint Project on Law and Finance]
?Bank ownership in China become more diffused
?Starting from 2014, there are 143 corporate bond defaults in China, involving 66 companies; Government involvement in 23 out of 66 case
Year(s) Of Engagement Activity 2019
 
Description Professor Gerard McCormack and Dr Zinian Zhang attended World University Network (RUC - WUN) Think Tank Summit 
Form Of Engagement Activity A formal working group, expert panel or dialogue
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Schools
Results and Impact Professor McCormack and Dr Zhang, on behalf of the University of Leeds, attended the Renmin University of China - World University Network (RUC - WUN) Think Tank Summit in Beijing on 23rd and 24th March 2018.

At the summit, Professor McCormack and Dr Zhang gave the papers examining the interaction between law and finance, which is particularly relevant in the context of China's Belt and Road Initiative promoted by the Chinese authorities.

The Renmin seminar was joined by the judges from the China Supreme People's Court and other local courts; some twenty local insolvency practitioners were also invited.
Year(s) Of Engagement Activity 2018
URL https://wun.ac.uk/article/renmin-university-of-china-ruc-the-worldwide-universities-network-wun-thin...
 
Description Professor Gerard McCormack and Dr Zinian Zhang gave presentation in Cambridge law school 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Schools
Results and Impact Professor Gerard McCormack and Dr Zinian Zhang were invited by Cambridge Law School in July 2018 to speak at a workshop with the delegates from the Zhejiang Provincial Supreme People's Court, China, on Chinese bankruptcy law reforms
Year(s) Of Engagement Activity 2018
 
Description Professor McCormack and Dr Zhang made visits to Beijing Universities 
Form Of Engagement Activity Participation in an open day or visit at my research institution
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Schools
Results and Impact Professor McCormack and Dr Zhang toured China University of Political Science and Law on Monday 26 March 2018 in the afternoon, meeting Professor Li Shuguang, one of the draftsmen of the China Enterprise Bankruptcy Law of 2006, Professors Chen Xiahong and Zhang Qingyu. Professor McCormack introduced the ESRC-funded research project on the development of China's bankruptcy law to the hosts. At this visit, Professor McCormack and Dr Zhang were granted honourable membership by the University's national bankruptcy law research centre.

That evening, Dr Zhang presented a paper at the seminar organised by the University's bankruptcy law research centre, which was attended by around 60 faculty staff, students and insolvency practitioners. Read the news report in Chinese from this university, please click here.

On the visit to Tsinghua University on Tuesday 27 March 2018, Professor Gerard McCormack and Dr Zinian Zhang was greeted by Professor Simin Gao, one of the top bankruptcy scholars in China. During the Tsinghua trip, they also met Professor Shangshang Liang, an eminent company lawyer, and Professor Laifan Lin, one of China's constitution law authorities. As scheduled, Dr Zhang delivered a seminar at Tsinghua that evening.

Professor McCormack and Dr Zhang's Beijing visit considerably raised the research profile of the Leeds University Law School, marking the first step for future research collaboration with China's top universities.
Year(s) Of Engagement Activity 2018
 
Description The Conference for Chinese Law Project Takes Place in Wuhan, China 
Form Of Engagement Activity A formal working group, expert panel or dialogue
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Schools
Results and Impact On December 15, 2018, Professor Gerard McCormack, Principal Investigator of the Chinese law project (sponsored by the ESRC) attended the conference in Wuhan, China on Reconsideration of Law, Finance and Economic Growth.

Professor Gerard McCormack introduced the establishment, purpose, and content of international insolvency law standards and focused on the applicability of international insolvency law standards. Professor Jingchen Zhao and Dr Chuyi Wei discussed their empirical research on derivative in China. Dr Zinian Zhang discussed the alternative procedure to the formal bankruptcy law in China.

The Leeds team was warmly welcomed by Mr Zuoyong Hou, the head of the Institute of Science and Technology Development at the University of Wuhan and Professor Qingyuan Li, Vice Dean of the economics and management school at Wuhan University. The members in the Wuhan team, including Professor Xian Huang, Professor Min Pan, Professor Yan Liu respectively gave speeches on the effects of legal origin on financial development, the effects of Chinese Labor Contract Law on corporate leverage level, and the ownership networks of Chinese banks. Professor Xiaoyan Song, head of the law school of Shanghai University of Finance and Economic also attended the conference and gave a speech on the and the role of legal origin and political, cultural factors in financial development. Other participants including scholars and postgraduate students.

The Leeds team, together with the Wuhan team, has already delivered a number of innovative and interdisciplinary works, including more than ten academic papers and eight research reports. The conference has contributed to an enhanced understanding of interdisciplinary studies of law and finance. It has also explored the latest theoretical discussions and institutional developments in Britain and China This conference might inspire future studies on the comparative aspects of two countries and can contribute to the policymaking in both countries.
Year(s) Of Engagement Activity 2018
URL https://essl.leeds.ac.uk/law/news/article/948/school-of-law-academics-attend-conference-for-the-chin...