As China’s economy has continued to experience economic growth at a rate unparalleled among modern economies, the country’s GDP has expanded at a rate of nearly 6-7% per year for more than 20 years. The Chinese economic miracle doesn’t have a comparison in modern times, as it has rapidly created an expanding middle class where none existed before. Indeed, a recent report by consulting firm McKinsey Consulting Group estimated that 6 percent of China’s urban residents qualified as members of the middle class in 2010, while also estimating that more than half of the PRC’s urban residents will be a part of this class by 2020.
The new Chinese middle class has come to expect the status symbols enjoyed by middle-class consumers in the Western world, car ownership among them. Car ownership in the country thus has grown at similarly astronomical rates to China’s GDP as cars have become a status symbol to China’s growing middle class. Nevertheless, there are a number of problems and issues that come along with car ownership aside from the simple cost of owning and maintaining the vehicle. First, there is the mandatory insurance that all Chinese motorists must carry under Chinese law. Second, China’s world-class congestion and accident rates make driving a perilous and time-consuming endeavor. Third, there is legal liability if a driver causes injury or property damage to another motorist or other third party. Although some Chinese citizens and expatriate residents choose to hire drivers and lease cars to deal with both the legal and other issues associated with owning a car, doing so does not necessarily relieve these individuals of liability under Chinese tort law for injuries or damages suffered by third parties in the event of accidents. Nevertheless, for expatriates living in China, it has become nearly impossible to obtain a license plate necessary to legally operate a car in China. The process is time-consuming, expensive and arduous. Therefore, for expatriates, the solution may ultimately be to lease a car and hire a driver for what will often be a temporary stay in China.
Obtaining a License Plate
Contrary to driving an automobile in some other countries, purchasing a car is the easy part for a foreigner in China. However, in order to actually operate a motor vehicle in China, an expatriate must obtain both a license and a license plate. This can be extremely difficult, particularly in China’s larger cities, where most expatriates are concentrated. Every major city has some form of virtual auction process by which license plates are sold annually. For example, Shanghai requires foreigners to hold a valid driving license, a visa valid for more than six months, and a Shanghai residence permit. Applications for license plates must be made through the local Vehicle Administrative Office. Even for expatriates who have taken these steps, Shanghai uses an auction system to sell its license plates, limiting the numbers available in order to stop the overabundance of vehicles in the city.
Beijing has a similar process. It requires that a foreigner residing in Beijing must have lived in Beijing for over a year, must not possess any “passenger cars” and must have an active Chinese driving license to apply for a license plate. In order to cut down on pollution and congestion, Beijing also carries out a license plate lottery system. If an applicant is lucky enough to win a plate in the lottery, they must pay a registration fee and a second fee to actually have the plate manufactured. Most major cities have gotten to the point where they follow Beijing and Shanghai’s lead in only allocating a fixed number of license plates through an auction process. A good resource setting forth each major city’s specific requirements is available here.
To complicate matters even further, despite the long odds of actually winning a spot in each major city’s license plate lottery, the process of obtaining a license plate in China for an expatriate can also be extremely expensive. As previously reported by the American business magazine Businessweek, the fees associated with obtaining a license plate can often be just as expensive as some lower-end car models. Therefore, expatriates often end up paying twice the normal price of a car that a Chinese citizen would pay.
Required Insurance Coverages under Chinese Law
Like most countries, China also requires drivers to obtain an insurance before operating a vehicle on its roads. Known as compulsory vehicle insurance in the PRC, Chinese law requires that all motorists carry insurance that provides coverage for any injury or death or property damage to a third-party in case of a road traffic accident Under the compulsory vehicle insurance, the driver holding the policy is not insured for damage to his own car or for injury to himself or passengers. The second type of required insurance that motorists must carry under Chinese is referred to as the commercial insurance, which covers all related claims that are not covered by the compulsory vehicle insurance.
World Class Congestion
Congestion is the first and one of the worst problems associated with owning and driving a car in China. Congestion in the PRC has become, and will continue being, a big problem as additional vehicles clog the streets of Beijing, Shanghai, and many other mega-cities. One estimate put the number of vehicles on China’s streets at 70 million in 2010, with that number increasing by nearly 15 million per year since then. Congestion in major cities has become so atrocious that some Chinese cities like Beijing are considering implementing congestion charges to enter the central area of the city, following the example of London and New York. This will make it even more expensive to own and drive a car for the average Chinese commuter, many of whom would be driving into the downtown of major cities like Beijing or Shanghai during rush hour when congestion pricing is at its peak.
A World Class Accident Rate
The accident rate in China is also another problem that Chinese motorists face. Accidents are becoming increasingly common on Chinese roads as congestion becomes ever worse. For instance, a report by the International Business Times determined there were over 200,000 fatalities from motor vehicles in China annually according to estimates by the World Health Organization. Notably, this was more than three times the estimate provided by the Chinese government officials for the same period.
The China Tort Liability Law
On July 1, 2010, China’s Tort Liability Law (the Tort Law), which was passed on December 29, 2009, came into effect. The Tort Law is an amalgamation of existing laws concerning tort liabilities, such as the General Principles of the Civil Law, the Consumer Protection Act, the Law on Product Quality, the Environmental Protection Law, and the Transportation Safety Law. The goal of the Tort Law was to set the general principles applicable in Chinese tort cases, including motor vehicle or traffic accidents.
The remedies provided in Article 15 of the Tort Law include compensation for both physical and serious psychological harm. Compensation for physical harm includes medical expenses, transportation costs, and loss of income. In cases of disability, the damages include expenses for disability-related appliances and disability compensation. In cases involving a death, a close relative can bring the tort claim, and the damages include funeral expenses and death compensation. The Tort Law specifically provides that in the case of serious psychological harm, damages for mental distress can be sought.
Property damages are also available as a remedy under the Tort Law for an injured or harmed party. Property damages are decided by the damaged property’s market value at the time of the tort or by a court in its discretion if the parties cannot agree on the amount of damage.
Is the Solution to Lease a Car and Employ a Driver?
One potential solution to some of these problems associated with owning a car in China can be found in the form of leasing a vehicle and employing a driver to get around China’s congested roads. Leasing a vehicle and hiring a driver can offer advantages that typically do not accrue to those who own a car under Chinese law. For example, it would free up time spent in traffic for the passenger to do other things, such as work, talk on the phone or simply relax and read the newspaper. It also can be a particularly beneficial alternative for foreign residents in China, who need not go through the expensive, difficult and time-consuming process of obtaining a license plate for the privilege of simply sitting in traffic in Beijing, Shanghai or any of China’s other major cities.
However, there are also barriers to this approach, both economic and legal. Although generally, a tortfeasor is liable for liabilities caused by his own conduct, which would mean that a hired driver would be responsible for the injuries or damages in accidents the hired driver causes, the Tort Law provides for vicarious liability in some instances. Some noteworthy vicarious liability scenarios that could impact someone who employs a driver are (i) an employer’s liability for torts caused by its employees’ execution of their work duties as well as (ii) the liability of a person receiving labor service for the harm caused as a result of the labor services by the service provider. Under both scenarios, if a hired driver hits or kills an individual in an accident, then the party hiring the driver could potentially be responsible for any damages or injuries caused by the hired driver.
However, leasing a car and employing a driver can also result in other expenses and headaches not associated with owning a car. Finding and employing a driver and the associated expense would be the first such issue that comes to mind. In addition, there is also the issue of having to rely on another individual’s schedule, punctuality, reflexes, and instincts in the event of a danger on the road. Finally, leasing a car may not require a large amount of money to be put down at one time as in purchasing a vehicle, but it still requires regular fixed payments.
As with many things, whether to own a car outright or to lease a car and hire a driver comes down to what an individual prefers. The second alternative can have practical benefits, such as freeing up the time spent in China’s horrendous traffic to do other, more productive things. It can also be a particularly beneficial choice for an expatriate who does not want to go through the rigmarole of having to purchase a vehicle, apply for a place in the license plate lottery and then pay the exorbitant fees required to purchase the actual license plate. Nevertheless, due to the vicarious liability principles provided for under Chinese Tort Law, the scenario of employing a driver may not relieve a party of legal liability in the event that a hired driver in a leased vehicle becomes involved in an accident and causes injury, death or property damage to a third party. However, for many expatriates, even this risk of legal liability may be preferable to an arduous process to obtain a license plate which ultimately might not be worth it, as many foreigners will reside in China for no more than several years at the most.
About IPO Pang Xingpu: IPO Pang Xinpu is a premier international law firm that has been representing clients in China since the early 1990’s. We’ve been here longer than the vast majority of corporate law firms, and have helped hundreds of companies across a wide spectrum of industries securely and quickly establish operations in China, and then provide follow-on services for their ongoing legal needs.