The other day, in a post entitled, “China Hostage Situation. Now IS A Good Time To Pay Your Debts,” I wrote about some U.S. executives who were being held hostage in China over nonpayment of a business debt. Their US based company had gone bankrupt and when they went over to China to explain all this to their Chinese suppliers, they were taken hostage. I have since learned that they were eventually released, though I do not know whether a payment precipitated that release or not.

Forbes Magazine just came out with an article, entitled, “How To Avoid Getting Kidnapped In China,” the thesis of which is that if you are going to do business with another company in China, you should find an “uncle” first who will be able to mediate any disputes that might arise between the two of you:

Before entering a partnership with a Chinese company, you should find an “uncle”–a person both parties trust who will be able to mediate differences. This assures each side that issues will be resolved fairly. I have seen too many American businessmen drag out an inch-thick contract with some clause that they think lets them out of a deal. To their Chinese counterparts, it is clear the Americans are cheating. Use relationships rather than legalese whenever possible to solve problems.

The article  even posits that this US company whose executives were held hostage could have avoided their fate had they had such an uncle: “The case written up by China Law Blog should have been handled that way. Had the foreign company turned to an uncle to smooth relations before declaring it would not pay, the dispute would never have gotten to hostage-taking.”

Well maybe. But I still think the safer tact would have been to get all of your people out of China and then negotiate a payment plan from afar.

The article then talks about the need to “build guanxi:”

Many Americans have heard of guanxi, but it’s often translated wrongly to mean relationships with powerful people. Guanxi means something very different from the American concept of connections. It means being in a social circle where you can let your guard down a little, because there is deep trust, perhaps from generations of coexistence, living in the same neighborhoods or even with interwoven family relations. In the case I was involved in, the CEO didn’t want to hurt his relationship with the uncle, and once he knew I, too, was in the uncle’s circle, he wanted to create a friendship with me.

Many consultants like to tout that they have good guanxi and can arrange meetings with powerful officials to grease the wheels of commerce. They may be able to get the meetings, but those powerful people don’t usually really trust them–especially if the consultants are former officials of foreign governments, as they often are. Building long-term trust is very difficult, especially for those who once sat across negotiating tables representing other countries. Acceptance into a guanxi circle can take years.

Long-term perspective is very important in China. A defaulting borrower should avoid saying he won’t pay and instead pay a little right away and explain that he is hurting but will make good in the future. You cannot rely on bankruptcy to absolve debts.

Bottom Line: We definitely agree on the need to build long term relationships in China and having an “uncle” is certainly not a bad idea. The real key is to build up your relationships before you need them. And if you owe money to someone in China, the wise thing to do is to not go to China until your debt issue is resolved.

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