China Business: Power Trumps Economics
Co-blogger Steve Dickinson and I recently engaged in a long e-mail discussion with a company that contacted us wanting to start a business in China that is forbidden to foreign companies. Because this is an ongoing matter for my firm, I cannot mention the type of business, but that is not necessary to convey the gist of our discussion.
Steve and I would explain that what the company was proposing is prohibited in China. The company would respond by noting how good its business would be for China's economy. Steve and/or I would then explain the risks of the government shutting down the business once it became at all visible. The company would then talk about how difficult it would be for the government to shut down a business that was doing so much to help so many Chinese businesses.
Finally, Steve and I started talking politics and how the Chinese government, above all else, acts to maintain its power. The company then noted how its business would help to lift up China's economy, which would in turn help the Party maintain its power. The company noted that this was the whole reason China has gone so capitalistic in the first place.
The company is both right and wrong, but mostly wrong. China's Communist Party does want to see China's economy expand, but it wants that mostly so as to maintain its legitimacy in the eyes of its constituents. Faced with a choice between allowing a foreign company to conduct business in China that will expand the economy, while at the same time presenting a real challenge to the supremacy of the Party, China will forsake the economy every time. Power will trump the economy every time.
And this should not be a surprise, because this is pretty much true (to varying degrees) of every government in the world. It is true of the United States, where certain industries are either formally or informally off-limits to foreigners and it is certainly true of present day Russia, where the government seems much more interested in controlling its oil production, than in maximizing it. For more on Russia, check out this post, entitled, "Russia Kills the Oily Goose." One can argue that in the United States we are talking about protecting the security of the country as a whole, not just the government, but when it comes to the impact on business, that is a distinction without a difference.
China is very interested in expanding its economic pie, but not so interested that one can analyze its actions strictly by using an economic model. Applying a strict economic model to Chinese government decisions regarding something as fundamentally economic as foreign business could prove mistaken. Using such a model as the basis for believing an illegal foreign business will eventually be allowed in China could prove disastrous. Not saying it could never happen (because there are examples of Chinese companies starting in prohibition of current laws and the laws then being changed to permit them), but I am saying the odds are heavily stacked against it.
Comments (16)
Read through and enter the discussion by using the form at the endDavid Li - January 17, 2007 12:44 AM
Well, if one had a business that could actually make an impact on the $2.225 trillion economy of China, I guess everything would be on the table with Chinese government, especially there was an investment of matching scale to go along with the business.
If the business is tech related, all public listed Chinese Internet companies are practically foreign owned but operate in business prohibited to foreigners by the Chinese government.
There are a lot of foreign own business operating in China on business prohibited to foreign firms. Get into good relationship with the local governments and have them deal with the central government. There is an interesting article on Fuzhou's public transit.
http://knowledge.wharton.upenn.edu/article.cfm?articleid=1324
Ryan - January 17, 2007 6:51 AM
I agree with you guys on this one, but there is a counterargument that has some merit to it. That is the fact that so many of the sucessful reforms carried out in "Reform and Opening Up" stage of China were not because the government had some brilliant ideas, but they were very good at recognizing that some of things people were trying were working and they got out of the way. But again, there is a strong difference between Chinese farmers trying out more efficient methods of subsistence farming and foreigners coming in to China running illegal businesses, and I think that's where your argument really hits home: I think foreigners are far less likely to be forgiven for breaking industry laws, and they'll probably get in trouble even if the new type of industry does catch on.
Sometimes I think of it in this way: the cuurent Chinese government will do practically anything it gain to try to hold onto power and enshrine its legitimacy, including and not limited to making people's lives better through economic reform and expansion. Therefore, those ideas that work their way up domestically and are proven to succeed help this legitimacy as the "government of China" while foreign ideas might even hurt its legitimacy. Great post.
-Ryan
China Law Blog - January 17, 2007 7:15 AM
Mr. Li --
I agree with you, but I will also state that some businesses are more sensitive than others. For example, if a foreign company were to go into China and start manufacturing something directly related to China's security (maybe military weapons), I can assure you it will be treated differently than a wholly owned foreign company in an industry that is supposed to be confined to joint ventures (maybe something like house construction).
China Law Blog - January 17, 2007 7:21 AM
Ryan --
Thanks for checking in. I completely agree with you and I struggled with this very thing in drafting the post. In fact, that is why I added the part about there being "examples of Chinese companies starting in prohibition of current laws and the laws then being changed to permit them." That actually has happened a lot in China and to a certain extent, I view that almost as China's version of federalism. The government lets things happen illegally, watches them and then if they work, enshrines them in the law. In the US, we watch what one state does and if it works, other states follow.
But, as you note, there is something different about foreign companies and I think that difference stems mostly from the fact that foreign companies are less popular among the Chinese people, which makes the government want to keep them in line. Conversely, however, I think to a certain extent, the government is at least as wary of a private Chinese company as it is of a foreign one because it knows it can dump the foreign one more easily and it also knows the foreign one is less likely to interfere politically.
This is a hugely complicated view and the only truly safe bet (and even that is less than completely risk free) is to abide by the law.
David Li - January 17, 2007 4:45 PM
For military weapon, I would think the business should worry more about US government then Chinese one. If it was weapon, I would think Chinese government will welcome with open arm. Hey, they are paying people stealing them in the US as we type. ;)
I don't agree that foreign companies are less popular among the Chinese people. Most people I know prefer to work in foreign companies. The government has more law for foreign companies because foreign companies are more obedient then their domestic counterparts precisely the general managers in the foreign companies have legal consult telling them "the only truly safe bet is to abide by the law."
chriswaugh_bj - January 17, 2007 8:22 PM
Mr Li, there's selling weapons to China; there's working with a Chinese company to build weapons in China; and then there's getting involved in the Chinese military industry in a way that the government could (quite rightly) perceive as a threat. I mean, for example, that the government would never complain about technology transfers to China (regardless of the legality), but any information on China's capabilities being leaked out, or even just the possibility of such information being leaked out, would set alarm bells ringing.
And it's not just guns and bombs and stuff, there are many other areas in which the government is wary, and rightly so, of foreign involvement. Energy security is an obvious one, as is finance, because these can all impact somehow or another on China's national security.
And foreign companies are far more popular than domestic ones in very many respects. A friend of mine just bought a second-hand IBM laptop even though she knows I use a brandnew Lenovo and that both are essentially the same precisely because the "foreign" brand carries more prestige. But, as has been pointed out by the far more qualified China Law Bloggers on many occasions, foreign companies are a much easier target for a multitude of reasons.
I'm sure many, if not most, foreign companies operate to some degree or another in legal grey (or even black) areas. Hell, I'm just a foreign teacher and I seem to spend significant periods of time in some grey area or another. But they can operate in these grey areas because the government sees some gain for itself in these operations, for precisely all the reasons that have been mentioned already.
David Li - January 18, 2007 6:05 PM
China is one of the top 6 exporters of weapon in the world along with the five buddies in UN Security Council. The capacity of China's weapon production could easily be estimated. Plus, if we learn any lesson from Cold War, they want the information to be leaked, well, to some extent to ensure your enemy think twice before launch an attach. Well, if China doesn't leak it, CIA can always make something up just like WMD in Iraq.
Chinese Test Anti-Satellite Weapon
http://www.aviationweek.com/avnow/news/channel_awst_story.jsp?id=news/CHI01177.xml
Foreign investment into the finance sectors are HOT now as the WTO mandate to open up RMB business for commercial in 2007 and personal in 2008. All of the rep offices in Pudong's high rise finally have something to do.
Energy sectors are opening up as well. A couple friends have been buying up coal mine; even buying up right to water property in Guizhzou for their hydraulic power potential. They are all looking for foreign investment.
I just attended a two days conference on an important standard in Beijing. I think the view from Beijing are terribly distorted reality of commerce in China with overwhelming patriotic rhetoric from just about every speaker.
China Law Blog - January 19, 2007 12:16 AM
Mr. Li --
I adopt Mr. Waugh's comment as though set forth in its entirety herein.
China Law Blog - January 19, 2007 12:17 AM
chriswaugh --
I completely agree.
China Law Blog - January 19, 2007 12:21 AM
Mr. Li (2) --
Thanks for checking back in. You comments on the seminar you attended are very interesting. You say you "think the view from Beijing are terribly distorted reality of commerce in China with overwhelming patriotic rhetoric from just about every speaker." Can you be more specific? Are you saying that the Chinese think too highly of their ability to compete globally or are you referring to them thinking too highly of China's place in the body of nations, or something else entirely? I would love to know.
Thanks.
Joseph Wang - January 19, 2007 9:26 AM
There is another reason to not try to violate government rules. Ultimately, I think everyone is better off if you live in a society that is based on law, and having people violate the law makes it more difficult to create such a society. It's a good thing to try to change the law, to find creative ways of going around the law. Sometimes it is necessary to break the law, but it shouldn't be done lightly.
The other thing is that the Communist Party and the Chinese government is not a monolith, and there are different people and different bodies which have different interests. As in the United States, the law that comes out is usually a compromise between different groups of people who want different things, and so it's not wise to think that the Party will overrule the law. People in the Chinese government take the law very seriously, and if something is prohibited, there is a usually a very good reason that you need to understand.
Also there is a difference between gray and black. If you end up in an area which there are contradictory regulations and laws, there is some room to maneuver. However, there are areas of Chinese law which are *DO NOT DO THIS* and you run the risk of losing everything if you get in those areas.
China Law Blog - January 21, 2007 1:27 PM
Mr. Wang --
I completely agree with you and you raise two (at least) very good points. One, that there are certain legal areas that are black and white and yet, so many Westerners, seem to think everything can be grey. Second, that there are different players in the government and that sometimes something is allowed for a while because certain players are prevailing and then that can shift quickly when there is a shift in power. It is very easy for new power players to use already written laws to their own advantage. It is also very easy for old powers to use already written laws to their advantage when the winds of popular opinion change, as they are doing right now in China in terms of cracking down on foreign businesses.
David Li - January 24, 2007 1:43 AM
The meeting is a governmental committee to draft a new standard. The talks are full of patriotic rhetoric but read between the lines, there are big difference in the motive of each speakers depending on their regions. Beijing's speakers talk big shooting for the moon with strong emphasis on government support. Speakers from Shanghai are more commercial oriented but try to grab the pie with government policy for market protection. Speakers from Shenzhen basically echo the rhetoric but really want government to stay out of the way. And there are speakers from foreign companies there simply to kowtow trying to ally Chinese government to fan off their bigger international competitors. The officials have to carry the rhetoric while trying to deny Beijing companies for support, Shanghai for protection, reel in Shenzhen under control and praise the willingness of the foreign companies to contribute.
But if one was to read the meeting in the news, it would be all about the China's ambition and unfriendliness to the foreign because every speaker was bashing international standard body and greedy MNC while waving the red flag.
When we said foreign companies here, we are most likely to talk about American companies, the personification of greedy imperialism and mostly target of China's bashing rhetoric. However, there are big foreign companies behind just about every China's important sectors, most of them European.
TD-SCDMA (China's 3G standard) isn't entirely China home grown. Siemen plays a big part. Alcatel has been a big part of telecom in China. Long cooperation between France and China in nuclear power plane. German and France are eager to sell arm to China again. So far, that covers telecom, energy and defense sectors all with flag waving talks in Beijing and silent European MNC deep in the industries. There are shadow of European MNC in all seven major industries marked by Beijing as essential to protect.
What I am trying to say is that there are much more dynamic under the flag waving talks in Beijing. It's easy to read the headlines of the rhetoric speech in an oversimplified manner. Nothing is truly black and white in China and I think the European understand these better then American with their long history operating in China.
China Law Blog - January 24, 2007 5:10 AM
Mr. Li --
Very interesting (but not all that surprising) how China's different regions approach things so differently. Do you really think that Europeans are better at seeing grey in China than the Americans becuase I truly have not seen that difference. But, since at least 80% of our clients are Americans and I tend not to be the one at my firm who closely interacts with the non-British European clients, I am not all that well positioned to know.
David Li - January 24, 2007 5:51 AM
I have been working with a French group in China for quite some time and I found their perception and approach to China very different from American. As French already master working the government back home, they feel like at home approaching Chinese government. Also, they hold higher regard of China, I think mainly coming from they learn about China through story of Marco Polo while American learn about China through China Town (the movie and all the China towns around) and the geeky Chinese boys one beating up in school playground. Plus, French pay as much attention to the food and enjoy drinking as much while talking business as their Chinese counterparts.
China Law Blog - January 24, 2007 8:01 AM
David --
What you say makes sense. Reminds me of a discussion a bunch of us had in Qingdao a few months back (2 Americans and 3 Chinese) of how Chinese tend to perceive the Japanese very much like Americans tend to perceive the French. La plus ca change ....