Neither I nor my firm have ever represented a Chinese company within China. There are many reasons for that, chief among them that we are not licensed Chinese lawyers and it makes no sense to use American lawyers for domestic Chinese legal work. I mention this by way of explaining why we lack knowledge of how the Chinese government treats its domestic Chinese companies.

But we do know that Chinese government regulation of foreign businesses has been steadily increasing and we also know that most of the laws regulating foreign businesses are at least supposed to apply equally to Chinese companies as well. And though I do not believe the Chinese government actually applies its laws equally between Western and Chinese companies, I was at least a bit heartened to read today, in a China Private Equity post entitled, “Under New Management — Chinese Corporate Management Is Changing Fast.

The post talks of how the Chinese government is becoming “increasingly demanding as a regulator and law-maker,” necessitating corporate management in China become “so much more complex.” The post rightly notes how “in a short space of time, China has gone from a more laissez-faire stance to one with strict environmental, tax and labor laws that rival those of the US and Western Europe.” These changes are having a major impact on how businesses are run:

True, these tougher regulations are not yet universally applied or enforced. But, any Chinese manager who chooses to act in total disregard of these rules will eventually find himself in deep, deep trouble. Take labor laws. China continues to introduce new forms of workplace protection that give important new rights to hired staff and restrict the prerogatives of management. Any Chinese with a complaint over pay or conditions can complain directly to the Laodong Ju, or Labor Bureau, a quasi-state body that enforces labor laws.

The post cites a concrete example of this change in the Chinese labor law context:

Example: a friend of mine worked for several years as a salesperson for an electronics company based in Shenzhen. She was paid part in commission. She did her job well. For months, then years, the boss held back the commission payments, claiming cash flow problems. This is old style China management: don’t pay, offer excuses. This boss assumed he could continue indefinitely with this trickery, in part because the general view is that female workers in China are more easily cowed or mollified.

Instead, my friend quit without warning, went right to the Labor Bureau, which made one call to her ex-boss. No investigation. Just a phone call and a stern warning from the Labor Bureau. My friend got her money – about $20,000 in total – within a week. The boss will now have a much harder time doing what he’s always done – pad his own take-home by cheating workers out of what they are entitled to. Tyrannizing workers is no longer a workable HR strategy for a Chinese management team.

The following great example is given in the Chinese environmental law context:

Example: a client of ours is the leading environmentally-friendly paper manufacturer in Shandong. Two years ago, he had 29 competitors in Shandong. Today, he has only three.

The other 26 were shut down, virtually overnight, for violating environmental standards. The managers at those factories, most of which were around for many years, now likely understand better than most how much the craft of management has changed in China.

As the regulatory environment continues getting tougher for Chinese companies, so too will it continue to get tougher for foreign companies as well.  The solution to all of this is as basic as can be: know the laws that apply to your business and abide by them, in China as you would at home.

In a guest post I did for Shanghaiist at the end of 20009, entitled, “China’s top 5 business law trends of 2010,” I stated that the “big, overarching trend 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” and predicted the following, all of which (not surprisingly) have come to pass:

  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.

In going back now and looking at that post, it is interesting (and not surprising) how angry it made someone, who left this comment:

Yeah yeah, another armchair “China Expert” lawyer posting from Seattle who doesn’t invest in China, pay taxes here or is licensed to actually practice here. Dan Harris – either shit on the pot and set up in China or sit in Seattle and shut the fuck up because you’re not exactly qualified to talk with first hand experience on the subject. There’s far better stuff in reviews elsewhere online to read than your tired, lame opinions.

To which, someone else (not me, I assure you) replied as follows:

Sounds like a bitter Old Hand who is nearly or already in hot water for Dan’s points 1-5.  China would do well to toss the old hands into its deadly rivers.

Those comments quite nicely and somewhat graphically sum up the split between those who want to do business the “old way” in China and those who insist that way no longer makes sense

Anyway, what are you seeing out there in terms of China regulation and how are you handling it? Old school or new school?

  • There’s still a bit of old school around, and it will take some time to clear that out (though new visa policies enabling a few babies to not be thrown out with the bathwater would be good), but definitely trending new school, and rapidly.

  • hanmeng

    I hope I don’t get a bath in the river for this, but do Chinese business regulations have what “hidden rules”?

  • Chris

    China getting tough on both domestic and foreign enterprises. Going ‘new school’ is critical to continued operations in the PRC.
    Many dinosaurs will go by the wayside.
    I note the H1 2010 national tax take up by 33% in the context of 10%+ GDP growth. Indicates a brutal enforcement crackdown on taxation across every region and enterprise.
    Chinese friends, business partners & suppliers advise that enforcement becoming very harsh. Many being reported by their own staff for infractions mostly related to minimising staff income tax.