One of the few things I dislike about my job is putting the kibosh on a project. I have had to do this many times to foreign companies with China projects that are just not legal.
I explain that if the project is illegal under Chinese law, it will always be at risk of being shut down by Beijing, local government guanxi or not. It is our job as lawyers to explain the legal risks and it is the job of our clients to decide what risks to take.
Our clients usually are not happy to hear that their China project does not comply with China’s laws, but this morning I got an email from a client thanking me for just that. The email is from a company that had retained us to provide legal assistance relating to their involvement in a large Chinese theme park. Just about the first thing we did was to warn this company of how the theme park would be operating illegally unless it secured necessary approvals from Beijing.
When our client sought assurances from its Chinese partners, the Chinese companies responded with the following:
- The American company’s lawyers (my law firm) knew nothing about Chinese law.
- The American company’s lawyers (my law firm) knew nothing about how China “really” operates.
- There is no law saying Beijing must approve these theme parks
- The law that requires Beijing approve theme parks is unclear (yes, they did argue both #3 and #4)
- The local government is behind the project and so Beijing is irrelevant.
Anything but assured, our client withdrew from the deal.
This client recently thanked us for having steered them clear of what could have been a “major time and money sink” and referred me to a Wall Street Journal article, “China Curbs Theme Park Projects,” explaining Beijing’s recent crack-down on illegal theme parks:
China has suspended the construction of large theme parks to clamp down on local government spending and rein in unauthorized real-estate development.
The country’s top economic planning agency has halted the construction of locally approved parks planned to be larger than 20 hectares or that have a total investment of more than 500 million yuan (US$78 million), according to a directive seen Tuesday.
“Since 2004, the State Council [China's cabinet] has clearly ruled that it must approve construction of large-scale theme parks. But in recent years local governments have approved large parks on their own,” the National Development and Reform Commission said in the directive.
The suspension took effect Aug. 5 and covers projects already approved but for which construction hasn’t yet begun. It will remain in place until the introduction of new regulations for the sector, the directive said.
The suspension comes as Beijing is under growing pressure to clean up the huge amount of debt that local governments have accumulated through infrastructure projects since it launched massive fiscal stimulus in 2008 to combat the global financial crisis.
I particularly love how the article talks of how the law is clear. It is. Take that Chinese companies!
In a previous post, How To Form a China WFOE. Scope Really Really Matters. we talked of how compliance with China’s national laws on Wholly Foreign Owned Enterprises (WFOEs) is essential:
If you take away nothing from this post, please at least understand that your getting local government approval for your WFOE does not mean you are out of the woods. There is little to no benefit in getting approval for a non-conforming [with Beijing] WFOE.
Similarly, in China. Where Everything Is Local. Until It’s Not, we talked of the importance of following China’s national (not just local) laws:
I used to write quite often of the differences in legal enforcement between China’s local governments and Beijing. Most of the time, these posts would conclude wtih our advising foreign businesses in China to get on good terms with their local governments, but to always still realize that being on good terms with their local governments will not insulate them from facing legal problems if they violate China’s national laws.
The Bottom Line: No matter what you hear from your Chinese partners and no matter what you hear from local government (or even national government) officials, if your business is going to be violating Chinese law, you will always be at risk of being shut down. You can choose to take that risk if you wish, but you should never just ignore it.
What do you think?
