China's complex regulatory system under fire

By Kirby Chien -Analysis

BEIJING (Reuters) - After a string of embarrassing health scandals, China has acted swiftly with rapid-fire steps that included executing a former head of its drug watchdog, but the moves ignore the systemic nature of the problem.

China's regulatory maze is legendary -- businessmen and officials alike are often bewildered by overlapping and sometimes conflicting regulations -- but the core problem is Beijing's inability to keep provincial and local officials in line.

"China suffers from a too small and too weak central government," said Eliot Cutler, the partner in charge of law firm Akin Gump Strauss Hauer & Feld LLP in Beijing.

"They have to increase the reach of the regulations and the government into the provinces," he said.

But that is much easier said than done, as the problems range from unchecked industrial pollution to exploding cell phone batteries and dynamite stored in residential areas.

China's single-minded focus on development over the past 20 years has produced the world's fourth largest economy and one of its fastest growing, but also created a generation of bureaucrats more interested in growth than safety.

"Local officials have been rewarded or punished for the speed of economic growth," said Steven Xu, director of advisory services at the Economist Intelligence Unit.

"It will take a long time to change their thinking," he said.

Zheng Xiaoyu, former head of the State Food and Drug Administration (SFDA), was executed this week for taking bribes, an unusually swift punishment the Communist Party said was aimed at deterring other wayward officials.

BLAME GAME

During Zheng's tenure, dozens died in China from fake or bad drugs and foods. Beijing unveiled this week tightened rules for drug registration as officials acknowledged regulatory loopholes.

But analysts say more fundamental changes are needed and could come out of the Communist Party's 17th Congress later this year.

"Punishment of a few officials will change nothing," said Cutler. "There has to be significant reform of institutions in the way governments in China react and respond to each other."

While greedy traders and officials can be blamed for allowing tainted toothpaste, unsafe toys and mislabeled ingredients on to the market, the central government's tendency to over-regulate can sometimes leave business executives scratching their heads.

"There is no indication that SAIC concurs with the Guidelines, and it may in fact have different criteria," law firm Heller Ehrman wrote in a recent report about merger guidelines.