PROBLEMS WITH DOING BUSINESS IN CHINA

In a Time magazine essay John Rothchild outlined some of the problems that foreign investors have doing business in China. "The first problem," he said, "is that the new companies have no experience in acting like companies. The idea that they are profit-making operations that owe their allegiance to people known as shareholders hasn't completely sunken in. When they get their hands on the proceeds from a stock sale, they don’t necessarily spend it for the intended purpose. Maybe they were in the textile business, but the next thing you know, the management is making a movie or opening dim-sum joints."

"Chinese companies maintain a close relationship with the state enterprises," Rothchild added, "from which they came and sometimes can be pressured into making loans and even donations to their old cronies. I'm also told that the Chinese consider it very impolite to turn down a request for financial assistance. This brings us to problem No. 2: How can the Chinese companies make a profit? In many instances, their biggest customer is the state, which doesn't necessarily pay its bills on time. This leads to the disappointments and disappearing earnings."

Investors complain about the dictatorial, bureaucratic and deeply corrupt ways business is done in China. In some cases contracts are cancelled at the last minute for no apparent good reason. Other problems include no reliable laws protecting foreign investor's money and contempt among Chinese officials at all levels for notions of accountability, transparency and equity.

Shady Business Practices in China

Companies routinely inflate profits, unlawfully help shareholders and affiliates secure loans and avoid paying of taxes. Many Chinese companies are secretive about their operation, financing and accounting and use creative accounting practices to conceal overseas assets, uncollected bills and unpaid debts.

Many foreign businessmen complain about the business tactics of the Chinese. Representatives of oil companies say that every time they find oil on a parcel of land, state-owned companies buy up all the land surrounding it. Several U.S. brokerage firms are suing their Chinese parties over millions of dollars of losses on highly speculative foreign exchange, real estate and stock market deals.

The Chinese will often help foreign companies set up a high-technology factory and then steal their secrets and set up a Chinese-run company---with cheap labor, land costs and raw materials---that competes with the foreign company and eventually takes its business away.

The desire to make easy money has led to the creation of a number of pyramid schemes and other ways to cheat people out of their money. Home buyers have invested their money in housing ventures after seeing wonderful model homes. When the houses are finished, the windows's don't fit their frames, the toilets are counterfeit American brands and white ceramic is substituted for promised marble. Home buyers that complain have their water and electricity cut-off.

Retailers often have a very short term outlook and have no qualms about fleecing customers if it brings them lots of money at that moment. There are few laws or sense of accountability to stop them. Shops take out advertisement promising cheap products that they don’t have in stock to get customers in the door. Customers that complain are treated with disdain, like they are the ones at fault for being so stupid as to believe the advertisement.

Red Tape in China

Some Chinese say that achieving success in China requires skill of navigating through the messy tangle of governmental bodies---national, provincial, city, county township, and even village and neighborhood---and dealing with a certain amount murkiness and not asking a lot of unnecessary questions such as where the money came from.

Opening a hotel in Shanghai requires the approval of 11 agencies, including the police, the fire department and various business licencing bureaus and foreign enterprise offices. Sometimes navigating through the the bureaucracy requires proceeding in a step by step fashion from one agency to another but more often means being bounced back and forth between agencies. Foreign businessmen often have to hire dozen or more Chinese to help get through the maze.

Once in Nanjing, a 1,000-ton shipment of steel passed through 83 different government work units and companies before it was delivered. The steel was bought and sold 232 times over several months, increasing the price by 300 percent.

Foreign companies are often restricted from hiring and firing who they want and often they are forced to hire Chinese employees on the basis of their connection not their skills. Simple things such as getting a land-line telephone installed and renting some property can be incredible hassle. Patience is helpful but probable the most important thing to have to get things done is guanxi (connections).

Shanghai mayor Zhu Rongji has been nicknamed Mr. One Chop because of efforts to reduce the number of chops or signatures on permits and bureaucratic documents. In a speech in March 2004, Jiabao promised to cut red tape for entrepreneurs.

See Bureaucracy

Legal Problems in China

China can also change the their laws quickly. In 1995, Beijing suddenly withdrew trade incentives’such tax breaks, duty-free imports of machinery---for foreign companies doing business in China. After signing a billion dollar deal General Motors suddenly faced the prospect of having to pay an additional $100 million of taxes on machinery for its car plant that it didn't think it was originally going to have to pay.

In October 2004, David Ji, an American businessman who had been doing business for sometime in China went to China on what he though was a routine business trip. He ended up being arrested and thrown in jail and involved in a legal battle with his former business partner in China The arrested is believed to have been prompted by pressure from the business partner on judicial authorities.

In 2004, a Chinese-born American businessman and citizen named Jude Shao was sentenced to 16 years in prison for not paying taxes. Shao said he was wrongly accused by tax auditors because he failed to pay a bribe.

Hard data is difficult to come by, and as the Rio Tinto case showed, if you work hard to dig and come up with good data you risk getting thrown in jail as a spy.

Speed is of essence, lest one gets left behind. Mao Jian, a Shanghai-based writer wrote in the Washington Post, “Sizzling in the wok is not stuffed buns, but hearts beating fast, faster and faster still. Got to speed up to make a buck. Tear down the old courtyard, fill in Suzhou Creek, race to register that domain name. One day late is forever late. Overnight a fairy sprinkles her pixie dust and that corner shed turns into an idyllic café. But when you walk in, you see the owner reading a how-to-guide on opening a restaurant. Yet another new idea sprouting. Longevity is not the goal; speed is the style in China today.”

Corrupt Business Practices in China

Businesses routinely publish fake company reports and perform false audits. Employees in purchasing and finance routinely are given kickbacks by suppliers. Personnel departments take money in return for jobs and interviews. To win their favor government officials are given stocks as gifts, sold houses at ridiculously low prices, and are allowed to win at gambling

Secretaries receive payment frm travel agencies for using them to book flights for their bosses; receptionists take money to refer calls to rival firms These practices are regarded as socially acceptable ways for ordinary people to supplement their incomes and save for retirement.

Managers brazenly transfer assets to themselves. According to one government agency more than a third of the companies listed on the Shanghai stock exchange have lent money to majority shareholders or transferred assets to managers resulting in billions of dollars of losses.

Data is routinely hidden or inflated. Managers are often hostile to minority shareholders and deny them dividends. Some use capital from selling their shares to start competing businesses. Others shift revenues from one firm they own to another, leaving shareholders with the losses. The belated disclosures about such practices rattle investors confidence just as much as corruption itself.

Those with something that other need try to use their position to cheat those in need. A hotel manager said he was told he had to pay a bribe to get gas in his hotel. He told the Los Angeles Times he refused and switched to higher cost diesel. “We have to be defiant and not be afraid.”

Problems such as illegal land seizure are the work of deals between developers and local officials. One Chinese economist told the Washington Post, “The government has the power and investors have the money. They join up and together extract all the benefits.”

A Chinese news reporter told the Yomiuri Shimbun. “They form groups to share the profit. And those that refuse to take a cut face danger.”

Increasing Corruption and What It Says About Chinese Society

"Corruption is growing all the time, because people and the country are growing richer," said Liao Ran, program officer for China and South Asia at Transparency International, a nongovernmental anti-corruption organization based in Berlin. Despite real efforts by the government, which include regular anti-corruption drives, detailed legislation and, its first anti-corruption white paper, corruption is just part of the system, Mr. Liao said.

Corruption is morally ugly, Mr. Fu warned. It also increases costs. "A society that relies on guanxi to get things done is a scary place," he said. "When guanxi becomes stronger than rules, it’s dangerous to everyone. Why? Because if you use your guanxi, I’ll use my guanxi, and in the end the price of everything rises. When there are no rules, then everything is a competition, and those with more power win," he said.

"Guanxi is alive and kicking," said Sarah Köchling of Whatif, an innovation consulting company in Shanghai. As China’s economy expands and becomes globalized, she said, people ask, "Is it going to reduce in importance?" "I think it’s going to grow," said Ms. Köchling, who has lived in Asia for more than 20 years.

Wrote Mr. Fu: "Everyone knows that 10 years ago, success was 30 percent guanxi and 70 percent talent. Today, to succeed, you can reverse the ratio. Seventy percent guanxi and 30 percent talent will do." Mr. Fu sees himself as both perpetrator and victim. A former philosophy student, he left his job in the human resources department of his alma mater, Xiangtan University, in 1992. "Had I remained a bureaucrat, I’d definitely have become corrupt," he wrote. "The reason is simple": Virtually everyone offered bribes.

"You can resist temptation once," he wrote, "but not a hundred or a thousand times." He went into business, eventually becoming the legal representative of an auction company, which he declined to name. Bribing officials was part of the job. By 2003, Mr. Fu had become enmeshed in a major corruption scandal involving justice system officials. "Friends" sold him out to the authorities. Jailed for 300 days, he thought up his first novel, he

Complaints by Foreign Companies in China

Foreign companies doing business in China complain of unpaid bills, piracy, counterfeiting and theft of ideas and technologies. Chinese insist that the foreign companies share their technology secrets. They then learn from these secrets and produce cheaper products that compete with those of the foreign company. Some companies complain that pirated or counterfeited copies of their products appear with a couple of months after they begin production in China. Others are reluctant to do business in China out of concern that their methods, patents and intellectual property will be stolen or compromised.

Different foreign companies have different experiences with their China partners. An employee for an architectural firm that did work in China told the Los Angeles Times, “I was a very bad experience for us. They’d yell at us, scream at us, demand things and say you couldn’t leave the country...until you finish the job. They expected us to work 14-, 16-hour days. They had some of my designers in tears.” An employee of another firm had nothing but good things to say. “They treated us like celebrities,” he said.

Pepsi went to the WTO to seek arbitration to break up a joint venture with one of it 14 partners, Sichuan Radio & Television, after becoming fed up with the way it lavishly spent money, made deals without Pepsi’s approval and refused to open its books to Pepsi auditors.

Foreign companies often complain they are required to pay fees and taxes without warning and explanation. See McDonald’s.

By mid 2000s, there was a growing trend of favoritism to Chinese companies at the expense of foreign ones. New regulations issued in June 2007, for example, required rigorous safety inspections of medical technology imported into China but didn’t require the same of Chinese-made products. Medical technology is one industry that the United States has had great success exporting to China.

Enthusiasm for investing in China goes in cycles. Disappointed by their profits and frustrated by the problems of doing business in China, many foreign investors and foreign companies have pulled out of China.

Rio Tinto Affair

In August 2009, Chinese authorities arrested four Rio Tinto employees in China--- Australian Stern Hu and three Chinese staff---on charges of bribery and illegally obtaining commercial secrets. A Chinese security agency accused Rio Tinto of engaging in commercial spying on China for six years to gain information on China’s steel industry and its negotiating strategies in talks over iron ore prices.

The whole affair raised questions as to exactly what a state secret is. Often it seems that even the Chinese government is not sure. As it stands now, according to the 1989 Guarding State Secrets law, a state secret concerns “the safety and interests of the country” with an additional umbrella cause covering “any other secretive matters” as defined by the National State Secrets Bureau.” The Guarding State Secrets law in the eyes of many is out of date in the digital age. In any case, if one is accused of spying there us little one can do to fight it as there are no trials for such crimes.

In March 2010, four Rio Tinto executives were sentenced to between 7 and 14 years in jail for taking bribes and stealing commercial secrets by a Shanghai court. China-born Australian citizen Stern Hu---the head of Rio Tinto’s iron ore operations in China---was given 10 years (7 years for taking bribes and 5 years for stealing commercial secrets, with parts served concurrently) and was fined about $75,000 and had $75,000 worth of assets seized. The other three were Chinese citizens employed by Rio Tinto. The sentences were tougher than expected.

All four Rio employees pleaded guilty to receiving kickbacks but their lawyers said they took less than they were accused of taking. Bloomberg reported that Hu pleaded guilty to taking bribes worth $879,000. Leaked testimony described steel mills handing over piles of money in boxes and plastic bags to secure cheap iron ore. Rio Tinto fired the employees but objected to charges of commercial spying. The Australian government complained about a lack of transparency at the trial,

Since the incident Riot Tinto has been trying to improve relations with China, its largest customer.

Overseas Chinese Accused of Business Crimes in China

Anecdotal evidence suggests that overseas Chinese are more vulnerable to such abuses than their non-Chinese compatriots. Last year, Stern Hu, a Chinese-Australian mining executive, was detained shortly after a deal between his company, Rio Tinto, and the state-owned Aluminum Corporation of China fell through. Convicted of stealing trade secrets and bribery, Mr. Hu was sentenced to 10 years in prison after a largely closed trial.

Xue Feng, a Chinese-American geologist who is serving eight years in prison on similar charges, said he was tortured during his interrogation. His supporters, including American diplomats, insist that the oil and gas industry data he sold was publicly available. In 2008,the authorities executed Wo Weihan, a Chinese biomedical researcher who had returned from Europe to start a medical supply company in Beijing. Tried in secret, Mr. Wo was accused of espionage, although the details of his crimes were never disclosed.

Even as official policies seek to lure Chinese-born inventors, academics and entrepreneurs with housing perks and financial incentives, lingering anti-Western xenophobia nurtured during the Mao years sometimes taints them as unpatriotic for having left. “It’s kind of reverse racism,” said John Kamm, executive director of Dui Hua, an American human rights group that frequently advocates on behalf of detained foreign nationals in China. “If you’re ethnic Chinese with a foreign passport, you’re really not considered a foreigner.”

China Jails Australian Businessman for 13 Years

In December 2011 Michael Wines wrote in New York Times, “An Australian businessman whose business dealings with a state-owned Chinese company soured in 2010 was sentenced by a Chinese court to 13 years in prison on bribery and fraud charges, his lawyer and Australian officials said. Two associates of the Chinese-born businessman, Matthew Ng, were also sentenced to 16 and 3.5 years in prison, Mr. Ng’s lawyer, Chen Youxi, said in a telephone interview. The sentences, which Australian news reports called unusually harsh, were also totally unexpected. Mr. Chen said he had not attended Tuesday’s hearing, in which prosecutors had been scheduled to present oral evidence in the case. [Source: Michael Wines, New York Times, December 6, 2011]

Mr. Chen said Mr. Ng would appeal the verdict and sentence. “My client is innocent,” he said. “The court does not have either enough evidence or legal basis for the sentence.” The lawyer was quoted in an August interview calling the bribery charge “ridiculous,” noting that the payment in question was both publicly reported and taxed, and suggesting that his client had been framed. He declined comment, directing an interviewer instead to a Chinese-language Web site that presents a defense against the charges.

Mr. Ng was detained in November 2010 amid a dispute between a travel company he founded, Et-China, and Chinese buyers led by Lingnan Group, a hotel and travel conglomerate owned by the Guangzhou municipal government. According to Et-China’s Web site and news reports, Lingnan had earlier sold Et-China a controlling stake in a subsidiary, GZL, that runs Guangzhou’s largest chain of travel agencies, for a reported $10 million.

In June 2010, a Swiss firm, Kuoni Group, agreed to buy Et-China in a deal that valued the company at about $125 million---including a multifold profit on its stake in GZL. Lingnan officials then demanded to buy the GZL shares back at their original selling price, news reports state, but Mr. Ng refused. Between September and November 2010, Guangzhou authorities detained Mr. Ng; Et-China’s chairman, Zheng Hong, and its accountant, Kitty Yang. Mr. Hong was sentenced to 16 years, and Ms. Yang to 3.5 years, at Tuesday’s hearing.

In sentencing Mr. Ng., the Guangzhou Intermediate Court ruled that he was guilty of embezzlement, bribery, corruption and falsifying records. Kuoni has since backed out of the purchase of Et-China. Australia’s prime minister, Julia Gillard, expressed concern about the charges in April during a meeting with Prime Minister Wen Jiabao. Australian diplomats had raised questions about the case with top Communist Party officials in Guangzhou, and sought without success to open the trial to news coverage and move it to a larger courtroom.

Mr. Ng’s case is one of several involving Chinese-born Australians that some critics say underscore the risks confronting foreign business executives in a legal system controlled by the same Communist Party that controls governments and many corporations.

Stern Hu, the Chinese-born Australian who negotiated iron-ore sales to Chinese steel mills for Australia’s Rio Tinto Group, was sentenced to 10 years in prison on bribery and espionage charges in 2010 after an especially bruising round of negotiations. Another Chinese-born Australian, Charlotte Chou, has been in Guangzhou jails for two years after becoming embroiled in a business dispute involving an educational institute she had founded. Australian officials also are reported to have raised that case with Chinese authorities without results.

Chinese-American Engineer’s Return to China Leads to Jail

Andrew Jacobs wrote in the New York Times, “After two decades of working as a successful engineer in the United States, Hu Zhicheng decided to return to China in 2004 and apply his rich experience to designing catalytic converters for the nation’s booming automotive industry. “I saw how polluted the air was here, and thought I could make a difference,” said Mr. Hu, a naturalized American citizen who has a doctorate in engineering.Now it seems he cannot leave. The last three times he tried to board an airplane and return to his family in Los Angeles, Mr. Hu, 49, was turned away by Chinese border agents who claimed that he was a wanted man. [Source: Andrew Jacobs, New York Times, November 26, 2011]

The problem is, he cannot find out exactly who wants him and why. Mr. Hu, an inventor trained at the Massachusetts Institute of Technology with 48 patents and a number of prestigious science awards to his name, was jailed for a year and a half starting in 2008 after a former business associate accused him of commercial theft. The charges were so spurious that prosecutors withdrew the case---a rare gesture in China’s top-down legal system.

But since his release 19 months ago, Mr. Hu’s life has been in limbo and his family has grown increasingly frantic. He writes to powerful Communist Party officials who he imagines might control his fate. A coterie of influential friends and colleagues has been lobbying on his behalf. And this month, his daughter, a sophomore at the University of California, Berkeley, began a petition campaign that has garnered more than 50,000 signatures.

Richard Buangan, a spokesman for the United States Embassy in Beijing, said that American diplomats had had little success in pressing his case with Chinese officials. “No authority has been cooperative with our request for information on the restrictions that block his departure from China,” he said.

Mr. Hu’s predicament highlights the potential perils of doing business in China, where commercial disputes can easily become criminal matters, especially when the politically well-connected use the country’s malleable legal system to bludgeon rivals. Most worrisome, legal experts say, are the country’s vague commercial secrets laws that state-owned enterprises---the companies that dominate China’s economy---sometimes wield to protect information related to production, procurement, mergers and strategic planning.

Case of Hu Zhicheng, the Persecuted Chinese-American Engineer

Hu Zhicheng, whose long résumé includes stints as a researcher in Japan and more than a decade working for an American designer of catalytic converters, the Engelhard Corporation, would seem to be the ideal returnee. In 2006, when he took a job as chief scientist for Wuxi Weifu Environmental Catalysts, a company in eastern Jiangsu Province, he also brought his wife and their two American-born children, in part, he says, because he wanted them to become steeped in Chinese language and culture.

His return coincided with a surge in domestic car production and government-led efforts to reduce tailpipe emissions. The company prospered, and so did Mr. Hu, who eventually became Wuxi Weifu’s president. It now provides catalytic converters for half of all Chinese-made cars. Mr. Hu’s troubles began after his company refused to buy components from the Hysci Specialty Materials Company, which is based in Tianjin and once supplied Engelhard.

According to Mr. Hu and his lawyers, Hysci would not take no for an answer. They say Hysci’s well-connected chief executive, Dou Shihua, sent Tianjin public security agents to Wuxi Weifu to pressure Mr. Hu to change his mind. The police raised allegations of stolen trade secrets but also suggested that the accusations would evaporate if the two companies did business together. Mr. Hu would not budge. “We have a system of quality control, and even one word from me could not change that,” he said.

In the end, the veiled threats gave way to an arrest, and Mr. Hu was put in a jail in Tianjin. The patent infringement case that prosecutors eventually built against him cited technology that has been publicly available in the United States for decades, according to several scientists who rallied to his defense. But even after prosecutors withdrew the case and Mr. Hu was freed, he found his return home blocked by immigration officials who claimed that he was still wanted by the Tianjin police. Each time he or his lawyer contacted the authorities there, however, they were told there were no such restrictions.

One of his lawyers, Wang Shou, said he believed that Mr. Dou, Hysci’s chief executive, was continuing to use his influence to exact revenge or get a deal yet. Reached by telephone, a sales executive at Hysci refused to comment on the case. The Tianjin Public Security Bureau hung up before answering questions about Mr. Hu.

His family does not know what else to do. Although his daughter visited last summer, Mr. Hu’s wife and 16-year-old son are reluctant to come here, saying they fear they, too, could be prevented from leaving. “I worry about my husband every hour of every day,” his wife, Hong Li, who is also an engineer, said by telephone from Los Angeles. “I don’t want my son to grow up without a father.”

The emotional anguish suffered by Mr. Hu has been compounded by pain from a herniated disc that worsened during the 17 months he slept on the floor of his jail cell. Earlier this month, at a chemical engineering conference on the outskirts of Beijing, he lectured about ways to reduce emissions from heavy trucks in China. As the conference wound down and his American colleagues headed to the airport, he made a joke about escaping across the border. “If I could only invent something that would make me invisible,” he said.

Image Sources: 1, 3) University of Washington; 2) Louis Perrochon http://www.perrochon.com/photo/china/

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.

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© 2008 Jeffrey Hays

Last updated April 2012