Crackdown on foreigners

We did a post a little while back, entitled, “Making Films in China. You Talkin’ To Me?” (please tell me you all got the Taxi Driver reference!). That post was written by Mathew Alderson, who though he has been practicing China law for about a decade, still expressed surprise at a commenter publicly boasting of having made an illegal film in China.

The point of the post was not to excoriate the commenter, but to make clear two things. One, there are repercussions to acting illegally in China and we, as lawyers, see those repercussions all the time. And two, our posts are directed to those who want to follow the law in China, not to those who want to break it.

A few commenters took us to task for our not siding with the law-breaker.

The best comment opposing us (by far, actually) was the following:

For what it’s worth, I completely agree with the dissenters. I don’t think any moral laws are broken in making a film in china that hasn’t been approved by the Chinese censors. It’s just a business risk, you might end up in jail or with a hefty bill, but that’s a risk some people will take, and good luck to them. No one has ever achieved anything in business without taking risks.

I’ve read this blog for several years, and whilst its advice is very valuable I can’t help noticing that it is increasingly geared towards established businesses with large amounts of capital behind them, where compliance is a major issue and they have resources to deal with it from the outset. It’s worth bearing in mind that a lot of people have built up businesses in china from nothing, dealing with regulatory issues as the businesses have expanded. In fact, thats how most businesses grow, rightly or wrongly, wherever in the world they are located.

Here is my response:

We do not disagree regarding morality. Nobody inculcated immorality into the discussion. I am a huge and unwavering fan of both the First Amendment and of guerrilla filmmaking so, as Bill Clinton would say, I feel your pain.

We also do not disagree regarding how operating in China illegally can be seen as just a business risk. That really was the point of the post:  here are the risks. Now you know the risks and can operate accordingly. If you want to operate illegally, that’s fine, but the odds are tremendous that you will incur real problems by doing so.

I also plead guilty as charged to our focusing more on businesses with more capital. Things have really changed on this since we started and that change has been driven 100% by the Chinese government, not by us.

When we started this blog back in early 2006, it was relatively easy to operate “off the gird” in China and many foreign companies were doing exactly that. Taxes were pretty low back then and tax collection was pretty spotty at best. Many legal business were not paying their taxes. All that has changed.

This change started out gradually, but then accelerated rapidly with the Great Recession. Though China’s economy weathered that time well, the Chinese language blogs were nonetheless rife with complaints by Chinese citizens about how foreign companies were taking jobs from Chinese citizens. The Chinese government responded to this by markedly stepping up its legal and tax enforcement against foreign companies and it has never stopped.

The Chinese tax authorities have been told in no uncertain terms to raise their tax collections and they see foreign companies as the easiest way to achieve their higher collection goals. On January 1, 2010, I listed out “China’s Top Five Business Law Trends for 2010” and my first three dealt with stepped-up legal enforcement against foreigners:

I see the following five key things happening on China’s business law front in 2010:

1. China will step up even further its crackdown on foreigners in China violating its visa/immigration laws. If you lack an employee visa, you may be at risk.

2. China will increase its efforts to root out and shut down illegal and unregistered foreign businesses. I have seen ample evidence of this already happening in the last 3-6 months and I have no doubt this will continue. Providing jobs to Chinese citizens does not let you off the hook.

3. China will increase its tax collection efforts. This has been going on at a rapidly accelerating pace over the last six months or so. If your China operations are not making a healthy profit, do not be surprised if the government imputes healthy profits to it. In particular, the government will look very closely at your transfer pricing and in many cases it will not like what it sees.

I see my role on this blog to be to tell it like it is, not to tell it like some of our readers wish it could be. And if that means that I have to say things that reflect the increasingly expensive reality for companies that want to operate in China, then so be it.

China right now is much more interested in preservation and harmony than in money and foreign investment. China realizes that it must comply with various international trade rules (or at least appear to be doing so), but at the same time, it rightly sees foreign investment as generally working at cross purposes with preservation and harmony. The effect of this view is that it is doing what it can to increase the expenses for legitimate foreign businesses (the new social insurance laws are great proof of that) and to extirpate those operating on the fringe.

If your business conflicts with China’s core interests you have a problem.

I sincerely wish it were otherwise, but my wishes do not reality make. Trust me when I tell you that I take no pleasure in saying that if you do not have the funds to do things legally in China, you are probably better off not doing things in China at all.

What do you think?

With few exceptions, the business law trends I see for China in 2010 are not all that different from what I would have seen last year or even the year before. The Chinese government’s primary goal is to stay in power (I think this is true of virtually all governments) and that goal usually drives the enactment and enforcement of its laws. The big, overarching trend I see for China in 2010 is its continuing to more strictly enforce its laws, particularly those that apply to business, and even more so those that apply to foreigners.

The Chinese government wants to satisfy its own citizens so as to maintain its own legitimacy and one of the best ways to do that is to show a desire to protect the citizenry against foreigners. China’s current economic strength is leading many in its government to believe China has little to no need for foreign investment and so I see law enforcement against foreigners continuing to increase.

I see the following five key things happening on China’s business law front in 2010:

1. China will step up even further its crackdown on foreigners in China violating its visa/immigration laws. If you lack an employee visa, you may be at risk.

2. China will increase its efforts to root out and shut down illegal and unregistered foreign businesses. I have seen ample evidence of this already happening in the last 3-6 months and I have no doubt this will continue. Providing jobs to Chinese citizens does not let you off the hook.

3. China will increase its tax collection efforts. This has been going on at a rapidly accelerating pace over the last six months or so. If your China operations are not making a healthy profit, do not be surprised if the government imputes healthy profits to it. In particular, the government will look very closely at your transfer pricing and in many cases it will not like what it sees.

4. China now sees itself as a full-fledged economic power and with that perception we can expect it will be stepping up its anti-monopoly monitoring of mergers and acquisitions. I predict China will seek to impose at least some conditions on all mergers and acquisitions that touch on China, if only just to show that it can.

5. The number of cases brought by employees and resolved in their favor will continue rapidly increasing. This will be particularly true with respect to foreign companies as this will be a great way for the government to show its willingness to protect its own.

* This is my December 31, 2009, post on Shanghaiist.

Jonathan Ansfield is out with another piece on China and, as always, it is beautifully written. If you want to read about Beijing from the perspective of a real writer (real writers not only write well, they observe things we non real writers do not) check out this piece, entitled, “Mean Streets” [link no longer exists]. It is on the recent police crackdowns on foreigners in Beijing. For the lawyers’ perspective on all this, check out the blog post we did a few weeks back, entitled, “China’s Law Enforcement Rising.

One of the things I keep hearing while here in China is increased monitoring of laws by Chinese authorities. I am hearing this both from those who are happy about this change and those who are unhappy.

One of our clients complained how a bank yesterday would not allow it to engage in a transaction our client tells us he had done many times before. When we explained to him how the bank was only following the law, he rightly pointed out how the law it was following had been in place for nearly a year. In a discussion I had with Andrew Hupert last night, he told me of how much better Shanghai is now than when he first came here five years ago. I asked him what made it better and he put “increased enforcement of laws” right after “better restaurants.”

Today’s Asia Wall Street Journal hammers home China’s increasing crackdown on law violations. The article by Loretta Chao entitled, China’s Visa Crackdown Reflects Olympics Anxiety, discusses a recent crackdown on visa violators in Beijing. The article mostly ascribes the visa crackdown to the Beijing 2008 Olympics, but I see it as being more than that. I see this as very similar to the disallowed bank transaction. Both are attempts to reign in foreigners who violate China’s laws and is motivated at least in part by a desire to improve tax collection by cracking down on foreigners working without permission.

Bottom Line: The trend is clear, unrelenting, and unequivocal. The number of Chinese laws aimed at business is increasing and enforcement of those laws is increasing as well. If you are a foreign company doing business in China, you would be wise to take note of this.