Header graphic for print
China Law Blog China Law for Business

Playing By The Rules On China Business. Rules, What Rules?

Posted in Recommended Reading

Stanley Lubman, an esteemed Chinese legal scholar, now at UC-Berkeley, wrote an excellent piece this week for the Wall Street Journal’s ChinaRealTimeReport. The article, entitled, “Stanley Lubman: Business in China: What Does ‘Playing by the Rules’ Mean?” sets out the dilemma faced by foreign businesses operating in (or with) China: Can they “do business in China without violating the law?”
I recommend you read the whole article, but if you choose not to, at least read the conclusion below:

In an era when the Chinese market is increasingly important to many global businesses, some over-eager participants may be tempted to bend the rules for fear of being “left out” or missing a good opportunity. They should resist the temptation, and heed McGregor (p. 122), who notes that many foreign companies “have policies of zero tolerance for corruption in China, and still do good business because their products are the best and in demand.”

I buy that.

  • tse

    Thanks for the link. I agree with what you are always saying and that is how I run my business here, and I am doing just fine. Sure, I probably could make more if I did not always hew to the rules ( true in evehttp://www.nimlok.com/company/services.aspxry country), but it just isn’t worth it. I am doing just fine and I can sleep well at night. I have been in China for 12 years and I have always followed the rules and never had a problem. I like it that way.
    On a more personal note. Thanks for all the great work you two have done throughout this past year (and before that). I get so much great advice here and I just want you to know how much I appreciate it and that I have voted for your blog on the ABA Journal and I urge everyone else to do the same.

  • Chris

    I suspect the compliance issues most foreign businesses face are no longer bribery of Chinese Govt officials or the like. That set of issues belongs well and truly to the 80/90s (and a few remote regions and some industries). The day-to-day compliance issues foreign businesses face are dealing with more mundane and serious issues such as the very heavy tax burden China places on legitimate enterprises (income, VAT, enterprise profit, withholding taxes), HR compliance and the 42-44% on-costs on salaries that get dropped into social insurance funds that local staff resent, keeping within very restrictive business scope set down by the Bureau of Industry and Commerce, dreadful regulation on e-commerce etc that restrict that sales channels any foreign businesses can directly control, etc. With local competitors able to structure their businesses to avoid many of these compliance costs, it does make success in the PRC marketplace quite tough and challenging for foreign enterprises. Foreign enterprises that exist just to export are comfortably positioned, those that aim to succeed in the domestic marketplace face constant issues and overhead costs significantly higher than domestic competitors.
    The pressures on tax & HR compliance for local businesses are also getting more serious. However, frequently they can uses local mechanisms to minimise these costs that foreign MNCs would not contemplate or accept. One common local practice to minimise income tax for staff & social insurance on-costs is to have local staff submit personal receipts as business expenses up to a specified amount each month. This enables staff to be paid at a higher rate than they are taxed, removes that social insurance on-cost on that component and enables the enterprise to claim what if actually employee costs as a business related expense.
    For organisations that prefer to keep only one set of books, this is not viable.
    These are the day-to-day compliance issues that face managers wanting to ‘stay legal’ in China, rather than the more dramatic bribery of Govt officials.

  • Stanley Lubman

    I welcome this comment for the examples that are given of current practices, and thank the writer. As for the examples that I gave, they were drawn from fairly recent observations by a very experienced China practice lawyer, but an additional illustration of just the type of conduct that I discussed has just emerged: UTStarcom was accused of having paid nearly $7 million over a 5-year period for gifts and foreign travel for employees of UTStarcom’s customers. “UTStarcom to Pay Fine for China Bribery,” Wall Street Journal, Dec.31, 2009) Some old habits evidently still persist!

  • Anon This Time

    Short and sweet. I used to work for a foreign company in China that was constantly violating the rules. It did not have written agreements with its employees and it did not pay their benefits. Many of its foreign employees did not have proper visas. Everything went fine for a couple of years but then problems started and many of us left. I am now at a foreign company that follows all of the rules and it is just so much better to know that we will be in existence tomorrow. Something nobody has mentioned is the impact this all has on morale. At my present company, I am not aware of anyone who is seeking a new job. At my old company, everyone was. Corruption starts at the top in a company and works its way down.