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The public can submit their comments on the draft by logging onto the website of the Legislative Affairs Office of the State Council http://www.chinalaw.gov.cn. The deadline for comment is May 26, 2009.

The draft rules are part of China's efforts to improve the recall system. At present, there is a patchwork of recall regulations in respect of special products – often it seems to be a response to an emergency of some kind. The first recall regulations were issued in relation to automobiles in 2004 – against a backdrop of foreign manufacturers not affording Chinese consumers the same rights as enjoyed in other jurisdictions. Other recall regulations were passed in relation to food and toys in 2007 – again responding to specific crisis in these areas. The recent PRC Food Safety Law which was approved by the National People's Congress (NPC) on February 28, 2009 also has specific provisions in respect of food products.

The draft rules currently being considered cover all types of products, whether manufactured within China or imported from outside. The only exceptions are drugs and military products which are excluded from the draft rules ambit.

The current draft states that manufacturers (including entities with production within China as well as importers or import agents) are required to immediately stop production and sale of defective products and commence a recall. Thereafter the manufacturer/importer will need to submit a report to the local quality inspection department immediately after the product has been confirmed to be harmful to human health and safety. The draft states that manufacturers must not conceal the hazards of their defective products and should report to the quality department details as to risks posed to human health and safety, damage or accidents that may have been caused as well as defects that have been identified outside of China.

The draft also states that sellers shall establish stock account and sales account, record details of sales including product type, specification, production batch and quantity etc. These details need to be stored for at least 3 years.

The draft also states that if sellers or service providers become aware that products may be defective and this is harmful to human health and safety, they should immediately stop sales, use or lease of products, inform the customers, producers and suppliers and report to quality department. The seller or service providers are also under a duty to coordinate with the producers to carry out the recall.

Penalties

The draft states that violators of the rules will be warned or asked to rectify the issue within a fixed period. Producers failing to comply may be fined between RMB 200,000 and RMB 500,000 or subject to sanctions under PRC criminal law.

Similarly, sellers or service providers may face fines up to RMB 200,000 on PRC criminal law sanctions.

Summary

The draft rules will, if and when they are issued, address a major concern of PRC consumers – how to deal with defective products. The main criticism one could have on the draft is that its provisions are still too vague and the penalties too limited to adequately protect consumers. However, as an incremental first step it is useful. On the other hand of the equation manufacturers and retailers would prefer more clear statements as to what is considered a “defect”, “harmful to human health and safety” and how best to deal with situations which fall within gray areas.

The new Food Safety Law further establishes an enhanced monitoring and supervision system, a product-recall system and a set of national safety standards.

Improved Regulation - pursuant to the law, the State Council will set up a province-level food safety commission. The current system of splitting food safety responsibilities among many different agencies has long been blamed for the uneven enforcement and confusion in the market. A major problem in the past has been the patchwork of standards. In order to combat this, the new law stipulates a set of mandatory national food safety standards. This was a key concern voiced in the Asian Development Bank policy note. Food safety standards will be the only mandatory food standards and accordingly, all food producers and business operators shall follow such food safety standards when engaging in food production and related business activities.

Despite the establishment of a food safety commission, the law still foresees a role for a variety of departments including the departments of health, agriculture, quality supervision and industry & commerce. These departments will shoulder different responsibilities such as risk evaluation, making and implementing safety standards, monitoring of food production and distribution etc. All in all the new law will likely make it much easier to determine the correct authority to be addressed and also to deal with co-ordination issues in case a problem arises.

Improved Monitoring - the new law establishes a food safety risk system to monitor food-borne diseases and food contamination as well as a food safety risk assessment system to assess risks as to biological, chemical and physical hazards in food and food additives. These safety systems will be regulated and implemented by the health administrative department of the State Council. In addition, the result of food safety risk assessments will also flow into revisions to food safety standards as well as to how food safety is supervised and administrated. The Food Safety Law focuses on prevention rather than resolving problems that arises.

Another important step the law takes is to cancel the exemptions from the inspection system. A major problem in recent years has been the system of “trusted” companies. These trusted companies were left largely unsupervised. As in the case of Sanlu, it turned out that some of the trusted companies were actually not to be trusted. The trusted system was cancelled by the Food Safety Law. Sanlu's shadow looms large over the legislation. As a result, the law pays special attention to the issue of food additives that lay at the heart of last year's infant formula scandal. Additives are prohibited unless proven to be both necessary and safe.

Food Recall Procedures- in the event that the preventative systems do not succeed, the law also establishes a regime for food recalls. Article 53 provides that a food producer which detects non-conformity with food safety standards shall promptly stop production, recall food already in the market place, issue a notification to related producers, business operators and consumers and record the recall.

Improved Enforcement- no matter how well designed a food safety system is, there will still be a need for coercion in implementation. Severe punishments are foreseen to warn off potential offenders. Enterprises found producing or selling sub-standard foodstuffs can be subject to claims of up to 10 times the price of the product in addition to compensation for the harm the product causes to the consumer. In severe cases criminal prosecution is also likely.

Summary

The PRC Food Safety Law will become effective June 1, 2009. For food manufacturers, abiding by the law may mean stricter tests on raw materials and tighter control of the manufacturing process. Compliance will likely increase the cost of production. The new law is an umbrella law which aims to establish a comprehensive supervision system for food safety and resolve turf fights between various supervision authorities and set national guidelines. The adoption of this law will not immediately change the food safety landscape. However, careful implementation will lead to improved food quality and safety for consumers of PRC products.
 

Perhaps the myriad of laws and regulators are part of the problem and not part of a solution. The existing PRC laws can cover the main points but it seems that problems remain due to a failure to enforce the regulations and not due to a failure to have enough of them. In addition there are so many authorities involved (Administration for Industry and Commerce, the Food and Drug Administration, the Administration of Quality Supervision, Inspection and Quarantine, the Standardization Administration, the Ministry of Health, the Ministry of Agriculture, the Ministry of Commerce, etc.) it may be difficult to determine the correct authority to be addressed in case of a problem and there are also co-ordination issues. Also it seems that local authorities have not fully enforced the regulations. As is often the case only the central authorities appear to be willing to take effective action.

Another problem appears to be that a number of large dairy companies were given inspection-free status by the General Administration of Quality Supervision, Inspection and Quarantine (China's product quality watchdog). As we have seen in Wall Street self-regulation or de-regulation is not always the right answer.

What's Next from a Legal Perspective

The PRC central authorities are now moving quickly to take action and calm consumers concerns including:

Cancelling Exemptions from the Inspection System – as mentioned above a major problem was a system of “trusted” companies being largely unsupervised. This system was cancelled on September 18, 2008 by the State General Administration for Quality Supervision, Inspection and Quarantine. On the same day, the State Council declared that the System of Exemption from Inspection for food quality was cancelled.

Draft PRC Food Safety Law - The government currently has a draft PRC Food Safety Law being circulated since April 20, 2008. This law will replace the PRC Food Hygiene Law, which is no longer considered suitable for today's China. The Draft law is an umbrella law which aims to establish a comprehensive supervision system for food safety and resolve turf fights between supervision authorities. It is expected that the Draft or its implementing regulations will be strengthened further in light of the dairy industry problems. One area of controversy is whether the food safety administration should still be done by a number of authorities (current method) or be done by one authority is still full of controversy.

Administrative Responsibility System – Up to now, 7 senior officials have been dismissed or have resigned due to the milk incident, including the Head of the State General Administration for Quality Supervision, Inspection and Quarantine (Mr. Li Changjiang) and the Mayor of Shijiazhuang (Ji Chuntang) resigning, the CCP Secretary of Shijiazhuang (Wu Xianguo) being dismissed, etc. Accordingly the government is taking responsibility. This distressing incident may be a spur to better and more effective regulation. Hopefully other governments facing different types of regulatory problems will also take specific action.