Follow The Signs & Stick To The Path

As with the “socialist market economy”, some China risks come with “Chinese characteristics”. They range from cultural traditions to corporate structures…and the role of government and the rule of law. Adapting to these characteristics is essential for success in China. As I note in “Risky Business in China”:

“In addition to globally-present risks such as fraud, bribery and corruption, there are some features of Chinese cultural, economic and business life that can create confusion and increase risk for the uninitiated, and which require the re-focusing of the average pair of western reading glasses if they are to be seen clearly. When they are misread, or completely ignored (as is still all-too-often the case) by foreigners trying to do business (or plan or evaluate due diligence) in China, there can be negative consequences. Some of the notable Chinese characteristics which might jump off the page and give the unsuspecting business reader a nasty surprise (or a handy insight), include:

Guanxi networks
Giving and losing face
Political rule of law
Differences and disparities
Information informatization
Different dreams and mutual benefits
Legal representatives, chops and phantoms
Shadow banking
Fake receipts
Variable Interest Entities (VIEs)”

In some quarters there is a tendency to see cultural issues like guanxi and face as being a bit soft, and separate from the daily grind of hard-nosed business dealings. But a lack of understanding can be costly...

The “guanxi” relationship a foreign business person has with a potential Chinese supplier may evaporate one the contract is signed, if a new boss takes over, or when operational problems mean that something has to give. And the sort of commercial guanxi brought in with the hiring of a top official’s child may also bring in some serious compliance issues, as JP Morgan found recently with their “sons and daughters” hiring programme (which has resulted in today's news that their former China investment banking head has been arrested by Hong Kong's anti-corruption agency).

Face also deserves more than a cursory look. The giving and receiving of face can represent valuable virtual transactions. But too significant a gift could be seen as a bribe, especially in the context of Xi Jinping’s anti-corruption campaign, while lack of sufficient attention can result in loss of face, loss of a deal, or due diligence warnings that are lost in translation as an interviewee tries to save face for the boss.

Just as these cultural quirks need to be managed with sensitivity, the complex nature of the Chinese economy, the role of government, and the rule of law need to be understood. For example, the official anti-corruption campaign took a good look at the pharmaceutical industry (another area of policy focus) and GSK became the “chicken to scare the monkeys” as legal enforcement suddenly tightened.

In addition there are such things as shadow banks, fake receipts and VIEs to be accounted for (not to mention the “other” sets of accounts). All things that traditional due diligence check-lists don’t usually cover - or uncover - but which are essential to risk evaluations in China.

They may be clichéd, but “Chinese characteristics” create risk if ignored. The best defence is to be informed, and to localise the approach to risk, as well as operational, management.

In my next post I will look at some of the repetitive risks that cause problems for international businesses in China, and how they can be avoided..

For more news and discussion on risk issues in China, join the Risky Business In China LinkedIn Group, and follow the @RiskyBizChina feed on Twitter.

“Risky Business In China. A Guide To Due Diligence” will be published by Palgrave Macmillan in September 2014.

Photo: West Hill, Kunming, 2013. © Jeremy Gordon