Pretty much since we started this blog, we have written posts that essentially set forth the following mantra:
- China has laws.
- China increasingly is enforcing those laws, against both domestic companies and foreign companies operating in China. Probably more against foreign companies operating in China than against domestic companies.
- You are entitled to complain about the harsher enforcement of China’s laws against foreign companies as compared to as against domestic companies.
- But you ignore China’s laws at your own peril.
Uber China lawyer Stan Abrams just came out with an excellent post that pretty much sets forth the above for the updated China world, which involves a stepped up crack-down on foreign companies. Stan’s post, entitled, Foreign firms ‘must follow Chinese law’ – Who Knew? quotes a Chinese government official who himself was quoted in a China Daily article, Foreign firms ‘must follow Chinese law’:
The government’s recent intensive antitrust investigations were conducted following Chinese laws and never purposefully targeted any enterprises, Lu Wei, minister of the Office of the CPC Central Leading Group for Cyberspace Affairs, told a panel during the World Economic Forum in Tianjin.
“China’s governance of the Internet follows the ‘bottom line’ approach, and all foreign Internet enterprises in China must follow the ‘bottom line’ of abiding by Chinese laws. There are two points. The first point is safeguarding the interests of China, which is very clear. The second point is safeguarding the interests of Chinese consumers, which is also very clear. Foreign investors, if they follow the two points, will be OK and welcome,” Lu said.
Stan then analyzes the above quote. He starts out by noting that the part of the quote about “safeguarding the interests of China,” isn’t “empty fluff.” He then writes about why it is important it is for foreign companies to understand how their company’s goals align (or not) with Chinese government interests:
Although it’s not always stated up front, and not in every law that pertains to company behavior, most folks know that if corporate interests are in sync with government priorities, that’s a huge benefit.
Example: Company A sells a clean coal technology to power plants. China is trying to fight pollution. Result – Company A, all else being equal, will do pretty well in China, at least in the short term. In contrast, Company B sells luxury watches that most people can’t afford, but the watch has been a preferred way of gifting government officials. But China is fighting corruption. Result – the watch company’s sales are going to tank, at least in the short term.
Stan’s views very much correspond with our own, as expressed in the post, China’s 12th Five-Year Plan. Go With It, Not Against It:
[I]f you want to know where China is going over the next five years, read the plan, as China has and will continue to hew closely to it. If your China business plan coincides with China’s Five-Year Plan, your likelihood of success will be considerably greater than if it does not…..To put it another way, “the trend is your friend.’
Stan then talks about how with all the recent investigations and fines being levied against foreign companies, foreign companies “feel like they are being singled out, while Beijing is saying: 1) most of our targets are domestic firms; and 2) but you broke the law” and then highlights why all of this really really matters to foreign companies doing business in China:
Bottom line here is that in the minds of regulators, these foreign firms have run afoul of local law and must face the consequences. As they are going to avoid commenting on specific cases, their only response is to say “Hey, follow the law and do what’s good for the country, and everything will be fine.” And if you don’t . . . well, bad things can happen.
So when a government official here says that foreign companies must safeguard the interests of China, you best pay attention. That is not the usual blah blah blah, but a very clear statement of reality.
He is absolutely right, of course. China is going after foreign companies and whether or not it is also going after domestic companies is of far less relevance to foreign companies, especially those that have experienced problems. And it is not just the foreign companies that are making the news. In the last few months alone, we have received phone calls or emails from foreign SMEs operating in China and reporting the following:
- A very small company in a relatively small city had four of its five American employees — all of whom had been granted work visas by Beijing — denied their residency permits because the business was not making “enough money” to support so many expats. This was the local governments way of saying that we do not think you are reporting enough income and paying enough taxes and if you are not going to economically support us, we are not going to support you.
- A mid-sized company in a mid-sized city told that if it did not pay at least double the amount of taxes next year, its use of foreign employees would be re-examined. The local taxing authorities believed that this company was not reporting all of its income and was penalizing them for this.
- Two American companies operating as Rep Offices told to shut down their China operations and go home because they were exceeding the bounds of what Rep Offices are supposed to do in China. One American company operating as a Rep Office told that by next year it would need to be a WFOE or it too would be gone.
- Multiple cases of companies being told that they need to stop buying so much of their raw material from outside China (i.e. Hong Kong) when that raw material is easily available within China. We find this particularly interesting because the Hong Kong companies from which the raw material is purchased are actually mainland Chinese companies that have illegally set up operations in Hong Kong so as to avoid paying mainland China taxes. We see this as part of China’s renewed effort to stop its own citizens and domestic companies from pushing money out of Mainland China. See Getting Money Out Of China. That’s Illegal.
We are absolutely convinced that Chinese government officials have been instructed to crack down on rule breakers, but because our law firm does not represent any Chinese domestic companies in their China legal matters, we have no idea whether this widespread crackdown is being also happening to Chinese domestic companies as well. But again, for foreign companies more interested in being able to operate in China than in geopolitical issues, the impact on domestic companies is usually going to be of only peripheral (if any) importance.
The bottom line is what Stan says: “‘follow the law and do what’s good for the country [China], and everything will be fine.’ And if you don’t . . . well, bad things can happen.”