Investors are often enticed by China’s enormous market. With over 1.35 billion inhabitants, the world’s most populous nation has baited many foreign businesses with its massive economies of scale and vast low-cost labour force.
But contrary to popular belief, doing business in China is not as easy as it seems.
The communist country remains the most difficult market to penetrate and profit from, in view of its complex environment, regulatory policies and state-linked interests. This is compounded by bureaucratic hurdles and widespread corruption.
As BreadTalk Group chairman George Quek warned in a 2013 interview with the Straits Times, “Going to China will not be a bed of roses.”
Many of these difficulties are not immediately apparent, as China’s state media white-washes the business climate. Zhang Kaichen, a former chief propagandist in Shenyang, told Epoch Times that the Chinese Communist Party (CCP) directs media outlets to “do big propaganda on Reform and Opening Up, do positive propaganda on the fruits of this policy”. They were also told not to “report anything bad” about the Party’s economic policies.
There’s also the expectation that Singaporean businessmen would have an easier time, as they have fewer cultural and language barriers to overcome. But many Singaporean investors have still been baffled by the cryptic business culture and, at times, underhand tactics by their mainland Chinese partners.
One such person is Matt Huang (pseudonym), a young investment professional from Singapore. In his semi-fictional novel ‘Young China Hand’ co-authored with Grace Hsu, Matt draws from real-life experiences as he details his perplexing maiden venture into China.
Matt had hoped to win a lucrative investment deal in China with a high-profile US$880-million (S$1.1-billion) private equity fund. But his task of managing the business investment, a duck farm empire in China, quickly fell apart as he was double-crossed and outwitted by savvier peers.
His plan was a fiasco and the investment became a divestment, after being betrayed by an expert ‘young China hand’ – a Chinese princeling-linked financier.
In his novel, Matt exposes the treacherous world of doing business in China, and offers a glimpse into China’s business culture, which some have termed “capitalism with Chinese characteristics”.
China under the Communist Party is an acutely complicated society. Foreign businesses that blindly follow the crowd into the Chinese market may find themselves entangled in serious trouble without ever realising why.
As such, it’s crucial to arm oneself with the experience of insiders. Here are 16 things one should know before doing business in China:
1. Lack of Rule of Law
The legal system is a pliable tool deployed by the CCP, and its rule of law is in constant flux. Even if foreign businesses bring their cases to court, China’s biased and powerless legal institution cannot protect foreign businesses from fraud by CCP officials.
In China, it is well-recognised that the Party is positioned above the judicial system. “Even if you are the judge, the Party will forever be positioned above the law, the country, and the people,” writes the Nine Commentaries of the Chinese Communist Party.
Author and entrepreneur Jeremy R. Haft, who has been building businesses in China since 1997, cautioned that the rule of law, the foundation of a capitalist economy, is not the same in China. Enforcement of its many laws is “extremely spotty, and often depends on whom you know and how much you are willing to pay.”
As such, when dealing with the Chinese judicial system, it is not uncommon to encounter bribery, political interference and facilitation payments.
Additionally, unlike Singapore and Western countries, businesses in China cannot rely on contract enforcement and protection of intellectual property, says Haft. The Chinese judicial system does not enforce laws to protect businesses from contractual breaches and intellectual property theft.
It’s also not unusual for successful Chinese entrepreneurs to be associated with organised crime, like Sichuan Hanlong Group chairman Liu Han. The Chinese billionaire was executed in 2015 for running a mafia-like gang in Sichuan for 20 years. He was said to have made his fortune through murder, fraud, extortion, operating illegal casinos and selling firearms.
Speaking about his experience in China, former Taiwanese businessman Lin Yuhe said: “Actually, there were no laws at all in China. We had to protect ourselves. I employed more than 20 bodyguards at that time. All of them were qualified top martial artists.”
2. Building Trust and Relationships (Guanxi)
Trust has been greatly eroded in China since the Cultural Revolution, when the nation’s youth were called on to persecute their own family members, teachers, and any other person deemed a “class enemy”. The violent movement created huge rifts in the social fabric, as millions were displaced, tortured, and starved or worked to death.
Today, China’s society is plagued by corruption, embezzlement, fake products, and other deceptive practices, which has created a climate of scepticism. People tend to be wary in public, even refusing to help strangers out of fear of being exploited.
“When pretending has been gradually molded into a billion plus people’s thinking and habits and has become the Party’s culture, the society itself becomes false, pretentious, and inane. Lacking honesty and trust, the society is in crisis,” writes the Nine Commentaries.
The dearth of trust between strangers is a major problem in Chinese society. But because one can’t depend on a legal contract when doing business in China, this has resulted in a strange phenomenon: Chinese businessmen resort to cultivating “trust” when negotiating with others.
The Chinese believe that prospective business partners should build a relationship, or guanxi, before undertaking business partnerships or agreements.
There is a fine line between guanxi practices and corruption in Chinese society. If you have the best guanxi, you can leverage on this powerful relationship to “pull strings” or exploit loopholes to get things done.
For these reasons, the time-consuming process of cultivating guanxi is of utmost importance when doing business in China.
3. Guanxi with Party Officials
Because the communist regime has an iron grip on the economy and heavily influences both the public and private sectors, it is vital for Chinese businesses to groom their guanxi with key party officials.
Billionaire tycoon Liu Han was able to evade the law for two decades, due to his connections with former security czar Zhou Yongkang.
Ironically, Liu Han’s fall from grace was also due to his guanxi with Zhou Yongkang, who was convicted of corruption charges under Xi Jinping’s anti-corruption campaign.
“Liu Han’s case is related both to the anti-corruption drive and Zhou Yongkang’s case,” Yang Zhaohui, a political scientist from Beijing University, told Australian Financial Review (AFR).
Chinese ‘princelings’, or descendents of influential party officials, have near limitless power and leverage on profitable opportunities. JP Morgan secured lucrative business deals by hiring many of these princelings, most of whom were unqualified for the positions.
Relatives of current and former party officials continue to run the bulk of China’s economy. They hold power in key business institutions, and own several key industries in the form of state-owned enterprises (SOEs).
The top jobs in SOEs are kept for those with the right guanxi, or those willing to pay a sum of money to land themselves an entry-level job.
These privileges remain inaccessible to ordinary Chinese, regardless of how hard they work.
4. Deception and Fraud
According to the Nine Commentaries, in the course of its history the Party has used various unscrupulous methods to seize wealth and deceive the people. This unethical means has had a trickle-down effect, turning the Chinese people into schemers of varying degrees.
There have been many stories of foreign businesses being defrauded by Chinese business partners or officials, who are often protected by the state.
Even if the business attains success in China, because of the lack of rule of law, the profits are still vulnerable to being robbed by the Chinese.
5. The Dominance of the State and State-Owned Enterprises
Despite the promise to open up China’s private sector, many large Chinese enterprises in strategic sectors remain state-owned. Moreover, some private firms are known to be manipulated by the state.
Thus, it is vital to know which “political side” your Chinese partner is on, as it impacts the way they do business.
Under an autocratic regime, China’s economy is not capitalist, writes Jeremy Haft in his book, ‘Unmade in China: The Hidden Truth About China’s Economic Miracle’.
The CCP has complete dominance over China’s banking sector, including state-linked banks like the Bank of China and the Industrial and Commercial Bank of China (ICBC).
Hence, SOEs have easier access to loans at discounted interest rates, while private enterprises (PEs) often have hard luck borrowing money, and have to turn to underground banks and loan sharks.
“State-owned companies often receive their land for free or at highly reduced pricing” and “energy is also often deeply discounted, as are raw material inputs”, writes Haft.
The losses of SOEs are covered by the state, while thousands of private small and medium enterprises (SMEs) are left to struggle on their own. There is little space for private businesses to survive.
In addition, many high-ranking officials have exploited their authority by confiscating assets from private businesses as cash grabs. One such person was former property mogul Zeng Cengjie, who had billions in assets seized and was secretly executed in 2013. Incidents like these have prompted many private Chinese businessmen to flee abroad with their assets.
6. Bureaucratic Hurdles and Fragmented Processes
When Korean entrepreneur and inventor of WELVA vacuum cleaner, Kim Kwang-Nam, was ready to introduce his products into the Chinese market, he was shocked by the numerous bureaucratic hurdles he faced.
“For example, it normally takes about 40 days for a product to receive patent approval and permission to produce a new product, but in China, the same process takes a minimum of eight months,” said Kim.
In China, making or bringing a product to the market is a fragmented and inefficient process, typically taking two or three times as many firms as in the United States. And in a globalised supply chain, a product may move through countless middlemen, maybe 12, 18, or even more hands in China, writes Haft.
“Each node of production adds risk that the outcome will be unsafe,” he said.
This system dates back to Chairman Mao’s concept of provincial self-sufficiency, where each province has its own steel mills, breweries, clothing manufacturers, and so on, and production outputs were controlled by the central government.
China’s supply chain fragmentation has foxed even experienced multinational companies like Mattel, which had to recall 967,000 lead-paint toys by its Chinese manufacturer. The lead paint came through several nodes of subcontractors, thereby escaping Mattel’s safety audit system.
“Although Mattel owned local factories, and even audited its outside contractors, it had not audited any of the subcontractors,” said Haft. “China’s supply chain is so complex and opaque” that errors can occur unnoticed.
7. Doctoring the Books
The finance department plays a critical role in any company, and this is much more so in China’s private enterprises. Accounting ledgers and bank balances are usually kept secret, and access is restricted only to the Chairman, CFO and select trusted allies like family members.
According to Haft, it’s the norm for Chinese firms to keep numerous accounting books and report different numbers to investors, partners, the taxman and the local government.
Frank Xie, a professor at the University of South Carolina Aiken, told New Tang Dynasty Television (NTDTV): “Many foreign companies who do business in China have to do the same too. One book is for the company’s internal use, while the other is for tax purposes and reporting to the central government.”
Fund transfers and dealings between affiliated companies are often not recorded, or brokered by a brief contract.
Since 2008, a number of Chinese firms listed on the Singapore stock exchange have been implicated in accounting irregularities, including FibreChem Technologies, Oriental Century and China Sun Bio-Chem.
The practice of fabricating statistics is an integral part of the CCP culture, wrote US-based Chinese economist He Qinglian in an article for Voice of America. She noted that the Party started keeping two sets of books during the Mao era, with one set of books used to con the public. To date, the National Bureau of Statistics continues the tradition by keeping two sets of books, one for the public and the other for internal use.
8. Getting Dirty
When doing business in China, it may be necessary to get one’s hands dirty.
“One of the biggest struggles I had in China was maintaining my ethics, maintaining those core values that, as Americans, we’re brought up with,” said Dr Lynn Knight, an American professor and management consultant who spent eight years working with international corporations and teaching at a number of universities in China.
“When you go to China, all of that gets turned upside down,” he said in an interview with the Epoch Times.
While working as a university lecturer, Dr Knight observed first-hand how cheating was widespread and seemingly accepted by Chinese students and teachers. A colleague at Jimei University told him that he could expect cheating from 75 percent of all students in China.
As a consultant for international companies like BMW and Lenovo, Dr Knight said that many foreign businesses were greatly concerned by the lack of integrity and morality.
Dr Knight believes that the government has an influential role in this mindset. He explained that this widespread public perception dates to the time of Deng Xiaoping, who encouraged the Chinese people to get ahead no matter the cost or circumstances. Deng famously said that “it doesn’t matter whether a cat is white or black, as long as it catches mice”.
Thus, it is not unusual for businesses to practice bribery and other dubious methods to earn the support of party officials, who can help win business and provide political protection.
According to a study by Charney Research, around 35% of companies in China report having to pay bribes or give gifts to officials in order to operate. These practices are more rampant among foreign and Hong Kong firms than mainland firms.
In China, gift-giving is a lucrative industry that has close links to the world of corruption and money laundering. In 2012, China’s Gift Industry Research Institute estimated that gift purchases accounted for about 768 billion yuan (about S$156 billion) yearly.
9. Widespread Job-Hopping
According to the Nine Commentaries, the CCP has fundamentally shaped the Chinese people’s perspectives of atheism and materialism. Through decades of iniquitous rule and campaigns, traditional value systems were dismantled along with the eradication of traditional religious and spiritual practices. Materialism and the single-minded pursuit of wealth were heavily promoted, as the only “real” and tangible purpose in life.
As a result, many young Chinese carry the life mission of getting rich and climbing the corporate ladder as quickly as possible, a means that is achieved through job-hopping.
“Job-hopping in China is a norm. By jumping one company, they would have double salaries,” said Mr Charles Wong, CEO of CHARLES & KEITH Group of Companies, at a talk held at NTUtive in June 2016.
The widespread practice of job-hopping is fuelled by China’s aggressive headhunting market, and is significant enough to create manpower problems for foreign businesses.
“The headhunting market in China was ruthless. They even called me and asked if I wanted to join them. My staff would receive calls from different headhunting companies,” said Mr Wong. “If I were not there, it would be a problem. That was the problem LVMH faced – manpower,” he added.
10. Hosting Dinner Banquets and Drinking Sessions
In China, most business deals aren’t negotiated during office hours, but outside of working hours over restaurant dinners, karaoke sessions in nightclubs, massage parlours or tea houses. To really impress your business partner, hosting a grand banquet is a good choice.
It also helps to have a high tolerance of alcohol, as drinking will be an indispensible part of the session. Some popular brands of Chinese liquor or baijiu are the Wuliangye brand and Moutai brand.
Not surprisingly, 82 percent of young Chinese consider drinking to be a ‘skill’ for career development, according to a 2013 Chinese Youth Daily survey.
Many Chinese believe alcohol allows one to be more candid and relaxed when conversing with others, thereby allowing partners to build closer relationships.
Therefore, networking and drinking sessions are perceived as crucial to facilitate friendships and build up guanxi to clinch a business deal.
11. Mistresses, Prostitution and Sexual Bribery
When hosting partners at nightclubs and massage parlours, it’s not unusual for prostitution to be part of the deal. Since 2010, several exclusive nightclubs in Beijing have been raided by police in prostitution crackdowns. These nightclubs, like the Heaven on Earth Club and the Baoli Club, have had a reputation for being frequented by senior executives and mid- to high-level party officials.
“Corruption, including sexual corruption, has lubricated Chinese economic development and the CCP’s rule… Sex scandals have become part of the Party’s rule,” writes the Nine Commentaries.
In China, businessmen are known to provide officials with prostitutes in return for favours. One example is the sexual bribery scandal involving drugmaker GlaxoSmithKline (GSK), where senior Chinese executives at GSK were investigated for bribing doctors with cash and sexual favours.
However, under the Chinese Penal Code, sexual bribery is not a crime, as the law does not prosecute bribery that does not involve a tangible, monetary profit.
While shocking by Singapore standards, keeping a mistress is another widely accepted practice in China. Businessmen and officials openly boast about their mistresses to show off their wealth, as mentioned in ‘Young China Hand’.
“As the corruption developed along with the economy, extramarital sex became part of daily operations among officials of the Party and the state and among businessmen,” writes the Nine Commentaries.
12. Dealing with Counterfeiting
With poorly enforced regulations on intellectual property, foreign companies in China have a tough time keeping counterfeit imitations of their products off the market.
At the same time, when sourcing for local products and services, businesses must also be wary of counterfeit ones, some of which can appear convincingly legitimate.
Mr Charles Wong said: “There are even counterfeit bank products in China. The websites look exactly the same as those banking websites in Singapore. It is very hard to control.”
“The police would close down all these counterfeit websites only if you pay them. Once you stop paying, all these sites would pop up again,” he added.
13. Giving Face
The Chinese typically prefer an indirect, non-confrontational approach to criticism, as they place paramount importance on “saving face”.
While working in China, Dr Knight learnt that one should not tell anybody to their face that they are lying or a mistake has been made. Say you’re in a meeting, and you know that the information they’re giving you is plagiarised, but they are trying to sell it as their own–despite everyone knowing the truth, no one speaks about it.
“You save face by denying to the bitter end that, ‘No, I am not cheating, no, I am not plagiarising, no, I am not taking advantage of you; you are obviously seeing things the wrong way!’” he said. “I was feeling I was in a world that was turned upside-down–the twilight zone.”
Criticism and feedback to higher authorities are frowned upon in Chinese organisations, which are extremely hierarchical. Senior authorities who are criticised “lose face”, which can land the criticiser in hot water.
On the other hand, showing respect or giving face to a higher authority – like pouring him tea or letting him dominate the conversation – could win you some points in business dealings, according to ‘Young China Hand’.
China’s rigid hierarchical system permeates all organisations, from businesses to political institutions. “The individual is subordinate to the organisation. The minority is subordinate to the majority. The lower level is subordinate to the higher level,” wrote Mao Zedong in his thoughts on discipline published in 1966.
14. Corporate Governance with Chinese Characteristics
According to Haft, corporate governance in China is nothing like a Western company with clearly defined roles and responsibilities. With no clear line of authority or defined job responsibilities, companies often lack necessary accountability.
Haft cites the example of Shanghai Waigaoqiao Shipyard (SWS), “China’s newest and most advanced shipyard”. When Shell audited the company prior to purchasing a rig, SWS failed every evaluation category. The shipyard did not have coherent systems for managing its suppliers, overseeing vendor performance, or managing design changes in mid-course. Health, safety, and environmental standards had not been implemented.
In ‘Young China Hand’, Matt writes that Western strategies like results-based management and operational excellence are considered a waste of time in China. “For people who like to contemplate, ponder and formulate strategies, China may not be the place for you,” a savvy Chinese investor advises Matt.
15. Police Non-intervention in Labour Disputes
While Chinese authorities are swift in crushing public protests, they take a hands-off approach with labour disputes.
In 2010, when labour strikes at foreign-owned firms like the Honda transmission plant rippled across China, the police did not step in.
The police also refused to intervene in 2013, when Specialty Medical Supplies China workers held its president Chip Starnes hostage for six days. The workers were demanding generous severance packages identical to those offered to 30 employees who were recently laid off, even though the firm had no plans for further lay-offs.
“For several years now, the central government in Beijing has seen labour disputes to be just that — disputes between workers and management. They are not related to culture, religion or politics. They are pure economic disputes and should be dealt with as such,” said Geoffrey Crothall, spokesman for the Hong Kong-based China Labour Bulletin.
16. Adhering to China Censorship
Doing business in China also requires one to adhere to harsh censorship requirements, a rule that has made it difficult for media and Internet companies like Google and Facebook to enter the Chinese market.
One of the few American Internet companies to operate in China, LinkedIn, bowed to Party regulations by censoring posts about the Tiananmen Square massacre on June 4, 2014, an action that drew widespread fire.
In March 2014, a Chinese printing company for Reader’s Digest was forced to remove a story, ‘Thirst’ by Australian author L.A. Larkin, although the edition was meant for publication in Australia, New Zealand, Singapore, Malaysia, and India. The reason was because the story mentioned Falun Gong, a spiritual practice that is banned and heavily persecuted by the Chinese authorities.
After reading these insiders’ experiences, are you still keen to invest in China, or would you rather steer clear?
If you’re still unsure, take a leaf from Li Ka-shing’s book. Asia’s richest man has been quietly pulling out of China since 2015.
|Why are mainland Chinese different from Singaporean Chinese, despite sharing the same ancestral roots?
Even foreign-born Chinese, Taiwanese, and Hong Kongers find it hard to fit into Chinese society.
The disposition of modern mainland Chinese arises from nearly seven decades of ideological education and campaigns by the Chinese Communist Party, which is geared towards instilling a system of thinking and values known as “Party culture”.
According to the article ‘Disintegrating Communism’ (www.chinauncensored.com), “Party culture includes three types: the first type, a culture forcibly instilled into Chinese people’s minds by the Communist Party; the second type, a deviant culture created by the masses who try to survive under Communist violence and lies; the third type, deviant and vile behaviours left from history, but re-packaged by Chinese communist theory, and widely promoted and applied.”
To learn more about how the CCP has altered the Chinese people’s standards for good and bad, visit www.ninecommentaries.com.