CHINA, DOING BUSINESS IN



INTRODUCTION

GEOGRAPHY AND TOPOGRAPHY.

China—officially, the People's Republic of China—is the world's fourth-largest country. It has borders with Russia, Mongolia, North Korea, Afghanistan, Tajikistan, Kirghistan, Kazakhstan, Pakistan, India, Nepal, Bhutan, Myanmar, Laos, and Vietnam. To the east are the Yellow Sea and the East China Sea, and to the south is the South China Sea. Hong Kong and Macao, once independent colonies of England and Portugal, respectively, have reverted to Chinese control (in 1997 and 1999). Over two-thirds of China is mountainous terrain, and the northwest includes the huge Gobi desert. The rugged western territories are difficult to access and sparsely populated; 95 percent of the 1.2 billion people of China live in the hills and plains of the east and south. Only 10 percent of the land is arable.

Because China's cultivation history is very old, much vegetation has been stripped, causing erosion. The three major rivers flow from west to east: the 3,000-mile Yellow (Huanghe) in the north, the Yangzi (Changjiang)—the longest at nearly 3,600 miles—in central China, and the shorter Pearl (Xijiang) in the south. The Yellow and the Yangzi are subject to heavy flooding; the controversial Three Gorges Dam is predicted to help control flooding such as the devastation that occurred in 1998 in central China. The deltas formed by these rivers are heavily populated. Most of the country has a temperate climate, with extreme cold in the north and subtropical weather in the south; rainfall is heavy in coastal regions. July and August are the wettest months.

For administrative purposes, China is divided into six regions: the northwest, the northeast, the southwest, the south, the central, and the east. China has 22 provinces—23 when Taiwan is included in the count—five autonomous regions, and the formerly British-governed Hong Kong Special Administrative Region. Four large municipalities are treated as additional provinces: Beijing, Tianjin, Shanghai, and Chongqing.

GENERAL BUSINESS CLIMATE.

China was closed to private business from the mid-1950s to the mid1980s. A new order began when Deng Xiaoping became premier, and made foreign investment possible through his policy of "openness" to the outside and "flexibility" internally, launched in 1979 at the Third Plenary Session of the 11th Congress of the Central Committee of the Chinese Communist Party (called in Chinese the "Third Central" for short). Foreign direct investment is welcomed; it has steadily declined since 1993 when the amount contracted from all countries exceeded $111 billion. The largest investor has been Hong Kong, and Guangdong province received the largest percentage of investment.

The three main challenges for doing business in China are to overcome the obstacles in obtaining market information, to decide strategic positioning issues—including a firm's location, PRC policies, and the role of local partners—and to conduct the negotiation process.

HISTORICAL BACKGROUND: ATTITUDES
TOWARD FOREIGNERS—BARBARIANS
BRINGING WAR

China's culture is at least 6,000 years old, with the earliest kingdom, the Xia, dating from around 2700 B.C., so a complete history requires many volumes. Therefore what follows is a summary of the important events involving foreigners in China. These events form the historical context for foreigners doing business today with the Chinese.

EARLY MILITARY CONQUESTS OF CHINA.

From as early as the Warring States period (403-221 B.C.), foreign invaders troubled China's borders. In the late thirteenth century A.D. the Mongols under Kublai Khan conquered and ruled China as the Yuan dynasty (1279-1368). As part of the bellicose Mongol empire, China expanded to cover most of Asia; this was the setting for Marco Polo's visit to China. But in the Ming dynasty (1368-1620) which followed, Chinese emperors turned inward to defend China from contact with foreign powers. The Ming dynasty was conquered by the foreign Manchu from the north (the Qing dynasty, 1616-1911) who expanded China's borders to their greatest extent in history, but at the same time closed them to foreign trade. Foreigners—considered barbarians—were primarily regarded as invading warriors, secondarily as buyers of Chinese products, and only rarely as sources of commodities and knowledge.

FOREIGN RELIGIONS AND WAR.

One important import to China from India in the second century A.D. was Buddhism. It was the greatest foreign influence on Chinese thought until the 20th century when communism came from foreign lands to China. Buddhism flourished until the I0th century when it began to decline, but it remains one of China's main religions today along with Taoism and two other imports, Islam and Christianity (in smaller numbers of adherents). Jesuits arrived during the Ming dynasty when China's attitude toward foreigners had become negative. Italian missionary Matteo Ricci (1552-1610) won the right in 1601 for Jesuits to live in Beijing—something no other foreigners were allowed to do—because of his astronomical knowledge. But in their almost 200 years in China, the Jesuits had little impact on Chinese culture. In the 19th century Christian missionaries from Europe and North America indirectly contributed to a political movement by a religious visionary from South China who claimed to be the younger brother of Jesus Christ. He founded a sect that incorporated some teachings of Christianity, and called it the "Heavenly Kingdom of Great Peace" (Taiping Tianguo). The militant movement spread, and in the ensuing huge civil war called the Taiping Rebellion millions of Chinese lost their lives.

TRADE AND WAR.

Trade with other countries for Chinese silk was already known before 200 B.C. in the late Han dynasty, and continued for many centuries; silk, semiprecious stones, and hand-crafted items such as carved ivory found their way to the Middle East, Europe, and South Asia. By the 18th century porcelain and tea became major exports by sea routes. Portuguese traders (1516) were followed by Spanish (1557), Dutch (1606), and English (1637). The foreign Manchu rulers (Qing dynasty), fearing instability from outside influences, initially refused European traders entry into the country and limited them to trading ports on the coast. In 1839 the English sent gunboats to force China to open to trade, specifically to the opium which England wanted to sell from the factories in India governed by the British East India Company. China resisted, and the armed conflicts became known as the Opium Wars (1839-1842), which China lost. The result was the Treaty of Nanjing (1842), the first of the "unequal treaties" that gave foreign powers autonomous concessions in major Chinese ports, and gave Hong Kong to Britain. Large trading companies opened in Hong Kong and the concessions, where their foreign owners grew rich. The privileges for foreigners became known as the Treaty System; in 1917 there were 92 treaty ports, containing foreign-governed and foreign-armed German, French, Russian, and Japanese concessions. Thus the Chinese experience of foreign trade was war, destruction, exploitation, and humiliation.

A final military attempt to expel foreigners from China took place in 1900 by the Society of Harmonious Fists, called the Boxers by Westerners to whom their martial arts looked like shadowboxing. Foreign forces put down the Boxer Rebellion, destroyed much of Beijing, and extracted a heavy indemnity. The Qing dynasty, weakened by the military and political losses that had begun with the Taiping Rebellion, finally lost the "mandate of Heaven" to rule, and in 1911 was overthrown. The Republic of China was born, based on ideas from foreign governments in Europe and the United States.

HISTORICAL BACKGROUND: FOREIGN
INFLUENCES IN THE REPUBLIC OF CHINA

Sun Yatsen (1866-1925), the revolutionary who inspired the overthrow of imperial rule, was a Methodist Christian educated in Hawaii and Hong Kong. He traveled widely outside China to generate support for his new, European-style government. Internal disorder plagued the young republic, however, and rival claims to the presidency gave way to a regional warlord era that lasted until 1927.

China entered World War I in 1917 on the side of the Allies, but in a secret agreement in 1919 the Allies gave the former German port in Shandong province to the Japanese instead of returning it to China. In 1919 students led protests over the weakness of the Chinese government in what came to be known as the May 4th Movement.

Into this political upheaval—which was accompanied by flood and famine, disasters frequently visited upon China—the Chinese Communist Party (CCP) was born in 1921, based on ideology from two non-Chinese, German political philosopher Karl Marx (1818-1883) and Russian communist leader Vladimir Lenin (1870-1924). The small party included Mao Zedong (1893-1976) and later, Chinese students who had embraced communism in Paris, among them Zhou Enlai (1898-1976). Communism was the most influential foreign ideology to impact China since Buddhism 1,700 years earlier. Sun's Nationalist Party, the Guomindang, had tried to cooperate with the communists, but his successor, Jiang Jieshi (Chiang Kaishek in the Cantonese dialect; 1887-1975) was determined to wipe them out. The communists were hunted down from 1929 to 1935; in 1935 a band of about 100,000 set out from the hills on the border between Hunan and Jiangxi provinces for Yanan, in the northern province of Shaanxi. The trek, later called the Long March, took over a year, and covered 5,900 miles; at the end the 10,000 to 20,000 people who survived had been consolidated into a strong military and ideological force.

In 1937 Japan invaded China; Japan had been nibbling at China's northern borders since the late 1890s. In 1931 Japan conquered all of Manchuria in the north. In 1937 full-scale war erupted and China suffered heavily in the brutal invasion. The Guomindang was demoralized by the Japanese attack, but the CCP grew stronger by taking the countryside between the cities held by the Japanese. By the end of the war the CCP was unified and strong, the Guomindang weak and corrupt. After a four-year civil war, the communists established a government in 1949 under Chairman (of the CCP) Mao Zedong that has continued to rule to the present, and Chiang Kaishek retreated to Taiwan.

HISTORICAL BACKGROUND: CHANGING
COMMUNIST ATTITUDES TOWARD
FOREIGNERS

In 1950 China and the USSR signed a friendship treaty. Western nations, deep in the cold war with the USSR, viewed China as an enemy of the free world. Chiang Kaishek, assisted by his wife, had gained the sympathies of the U.S. government, which recognized Taiwan as the seat of the legitimate government of China. The Korean War (1950-53), in which China supported the North Koreans alongside the Soviets and the United States supported South Korea, heightened the hostility between China and the United States. The Central Intelligence Agency trained and armed anticommunist guerrillas in Tibet, and the ensuing uprising led to massive Chinese military force against Tibet in 1959.

The Soviets helped China draw up its first five-year economic plan (1953-58) and assisted China with the construction of 156 state-owned industrial plants. A new centralized economic administration took over the public sector, agriculture, and urban private enterprise. But the bond between the USSR and China began to unravel, and at the end of the 1950s all Soviet advisors were called home. They took blueprints of unfinished buildings, industrial machinery, and even railway ties with them. Once again, China felt betrayed by foreigners.

From 1958 to 1970 China was closed to the outside world. Mao engaged in economic and political experiments, two of which are discussed below. In 1970 China's relations with the West began to improve; Canada and then the United States established diplomatic relations. In 1972 President Nixon visited China, and that same year China took its seat in the United Nations General Assembly, resulting in Taiwan's expulsion.

HISTORICAL BACKGROUND:
COMMUNIST POLICIES

Throughout its first 50 years, the new People's Republic of China experienced an alternate tightening and loosening of economic and political policies by the CCP. The two main goals of the new regime in 1949 were to redistribute wealth by land reform, changing the traditional rule in the countryside; and to build a new centralized power structure under the CCP. The "Five Anti-" campaign of 1952 was directed against bribery, tax evasion, theft of state assets, cheating on labor and materials, and stealing state economic secrets—behaviors that have become the chief targets of reform once again in China. In 1956 the CCP shifted the economic base to socialist, rather than private, ownership; the people owned all business and industry in China.

In 1958 Mao launched the "Great Leap Forward"—a campaign for economic development based on deliberate destabilization. The countryside was organized into 26,000 communes of 2,000 to 20,000 households. Mao urged the communes to achieve impossible production quotas, and treated skepticism as a crime against the state, a combination that resulted in falsified reports. Meanwhile, laborers working in "backyard foundries" to produce low-grade steel from hand-fed furnaces, in Mao's effort to localize heavy industry, were not available to harvest crops. The result was inconceivable famine: an estimated 30 million people starved or died from disease related to malnutrition in the "three bitter years" from 1958 to 1961. In 1962 agricultural communes were abandoned in favor of cooperatives, and individual families were allowed to keep what they grew beyond their quotas.

Mao's economic experiment had failed, but in 1966 he launched an even greater ten-year disaster, the Great Proletarian Cultural Revolution designed to reform Communist Party cadres, Mao's very supporters who Mao believed had become too complacent and bourgeoisie. Mao created the Red Guards (not to be confused with the Red Army, as China's military, the People's Liberation Army, is called by the West), a student-age group. But the Cultural Revolution soon got out of hand as students, joined by thugs, killed unknown numbers of people, razed nearly 500,000 temples, and destroyed much of China's rich heritage of artifacts. Productivity abruptly declined as workers held "struggle sessions" in which some criticized others for not being politically correct. Millions were struggled against and suffered some loss. In 1968 Mao had sent millions of young people to the countryside to learn from the peasants. Universities and schools were closed, and teachers were sent down to the country to work in the fields. The damage the Cultural Revolution did involved a general breakdown of law and order, a slump in productivity, a stagnation of food prices, an undermining of the incentive system, a crisis of confidence in the Communist Party and Mao, disruption in education and government, and tremendous personal suffering. Mao finally had to turn to the army to impose order.

In 1970 Premier Zhou Enlai, with Mao's support, began the "Four Modernizations" program for economic renewal, targeting industry, agriculture, science and technology, and the military. Population control was addressed seriously, leading in 1979 to the "one-family one-child" policy. Zhou died early in 1976 and Mao in September of the same year. His wife and three associates, the notorious "Gang of Four," were arrested and tried, bringing the Cultural Revolution to an end.

In 1982 China adopted a new constitution that restored the office of head of state (president, rather than "chairman"). Millions of people who had been criticized, condemned, or purged during the Cultural Revolution were rehabilitated. Although serious opposition to the Communist government and its policies was not—and is not—tolerated, in November 1978 a movement began for the spread of information called the "Democracy Wall." People wrote criticisms of the government and pasted them to a wall in Beijing where they were eagerly read; the Wall was closed in December 1979, with arrests of "political dissidents." Expressing critical opinions about the government has alternately been encouraged and repressed by Beijing. At the end of the 20th century, Beijing was once again arresting dissidents.

In 1989 another student-fueled demonstration took place, in the large Tiananmen Square in Beijing. Hu Yaobang, a Communist Party chief who had been forced to resign in 1987 following his support of student calls for increased democracy, died in 1989. Thousands of students gathered around funereal wreaths placed in Tiananmen Square to commemorate him. The gathering snowballed into a pro-democracy demonstration in which students called for freedom of information and more direct access to government leaders. When the government of Beijing called in the military, more than 3,000 unarmed civilians were reportedly killed when soldiers opened fire.

PRESENT-DAY POLITICAL AND
ECONOMIC STRUCTURES

GOVERNMENT.

China, according to its constitution, is "a socialist state under the people's democratic dictatorship led by the working class and based on the alliance of workers and peasants." The Chinese Communist Party (CCP) holds political power. The CCP makes policies and the government carries them out. About 4 percent of the population of China are members of the CCP.

The National People's Congress (NPC) is a body of 3,000 representatives who are elected by fellow CCP members every five years (2003 is an election year). This legislative branch of government meets every March to approve what the State Council and the Central Committee of the party have planned. The cabinet of the government is the State Council, an executive arm of the NPC, directed by the premier who is the head of government. The State Council is made up of the premier, four vice-premiers, ten state councilors, the ministers in charge of ministries and commissions, the auditor-general, and the secretary-general. The NPC elects the president who is the chief of state, and vice-president; the president nominates the premier who is confirmed by the NPC. The NPC also appoints the judges who serve on the Supreme People's Court. The premiers of the provinces, autonomous region government heads, mayors of the four large cities, and the chief administrator of the Hong Kong Special Administrative Region all report to the central government. Below this level are county, township, and village governments.

POLITICAL PARTIES.

The Chinese Communist Party (CCP) is the party in power in China; there are eight other registered political parties, all protected by the constitution and controlled by the CCP. At the head of the CCP is the general secretary. Below him (it has always been a male) is the Politburo Standing Committee, consisting of five people. They in turn give direction to the Politburo, which has an additional 12 members for a total of 17. The Politburo is the superior body to the four-member Secretariat and to the CCP Central Committee, which is the main party organ with 210 members elected by the National People's Congress every five years. The Central Committee represents and directs the party committees in the provinces, and they in turn direct local party members. The Politburo directs the Central Military Council as well as the Central Committee, and it in turn has power over the People's Liberation Army.

In all government industries, agencies, and bureaus, the organizational structure is mirrored by a party structure. The director or president follows the lead of the party secretary for that organization; the party secretary may also hold a title such as deputy director or vice president, or—in a commercial organization—chairman of the board. At each level throughout the organization a parallel party structure exists; the party members are usually employees of the organization at the same time. Their membership in the CCP gives them upward mobility in their work organization. All decisions are made in consultation with the party hierarchy in the organization. Typically, as people move to higher ranks in the CCP they also assume positions of greater responsibility in their organization. Generally it is not possible to achieve a high position in an organization without party membership.

ECONOMIC STRUCTURES.

By traditional measures, China's economy is the tenth-largest in the world. Studies by the International Monetary Fund (IMF) and the World Bank that compare consumers' purchasing power find China's economy is the third largest, after Japan and the United States, but these figures may be inflated. Nevertheless, China's economy in the 1990s had official growth rates that led other nations: official reports were of 10 to 15 percent in the mid-1990s, with unofficial estimates as high as 22 percent. By the late 1990s when Asian countries experienced a sharp decline in growth, China was still recording 7 to 8 percent growth annually, one of the fastest-growing economies in the world. IMF forecasts predict that China will overtake the United States and Europe to become the world's largest economy by 2007, and that by 2010 its economy will be triple that of Japan's. At the end of the century, China was the second-largest receiver of foreign capital in the world, surpassed only by the United States. China is in the top ten among suppliers of capital to world markets. The biggest investment targets for the Chinese are Canada and Australia for raw materials, and increasingly, Europe as well as the United States.

This rapid change has come since the early 1980s when consumer goods were scarce, per capital annual income was about one hundredth and exports were a tenth of those at the end of the 20th century. As market forces are given more sway in the "socialist market economy," particularly with the town and village enterprises, an increasing percentage of commodity goods are distributed through market channels at prices set by the market. This coincides with greater decision making on local levels. The annual per capita income rose from approximately 120 yuan in 1984 to 11,420 yuan in 1997. The gross domestic product quadrupled from 1978 to 1998. Nevertheless, not all the impact of growth was positive. Negative results of the hybrid socialist-market system include the bureaucracy, corruption, and inertia of socialism, and windfall profits and inflation of capitalism. Some cities registered inflation of more than 20 percent in the mid-1990s, although by 1997 inflation dropped sharply as a result of market factors and government restraints to control food prices and exercise tighter monetary policies. All economic indicators showed the biggest leaps from 1993 to 1997.

ECONOMIC REFORM.

Economic reform in the 1990s focused primarily on the heavy-industry state-owned enterprises (SOEs) and on banking. Management and planning for the SOEs was decentralized, and they were made responsible for their own profitability, in a move that was widely interpreted as a market-oriented economic change. But regional banks continued to write loans with virtually no liability to themselves, since the central government continued to make funds available to shore up the liquidity of state enterprises, and the enterprises themselves did not face bankruptcy if they did not operate in the black. As incentives to effect the transition from state-run to self-run, local officials were allowed to tax enterprises without constraints. At all levels, the system made possible the use of economic power for personal gain. SOEs continued to lose money, however, with the government in 1997 estimating that two-thirds were unprofitable. Under this system workers had few incentives and their productivity was low. In 1998 hundreds of SOEs were closed down and an estimated 12 million workers lost employment. The SOEs provided employees' housing, special access to food products and consumer goods, health care, education for the children, and pensions. As the state unburdened itself of these expenses, rents for housing units, which had been about $10 a month in 1998 for the standard 50 square meters, were allowed to rise. Zhu Rongji mandated home ownership and directed enterprises to end housing investment, thereby tackling a difficult reform which had been officially recognized since the 1980s but had not been implemented. At the same time, millions of workers were without the unbreakable "iron rice bowl" promised by the socialist government since 1949. The number of laid-off employees grew to over 16 million by some estimates. Surplus rural workers numbered from 40 million to 100 million, drifting from countryside to cities. Meanwhile, new jobs were not created at the same rates. Disaffection and distrust of the government grew.

About 75 percent of the SOEs had been turned over to local governments at county and city levels by 1998. Scores of firms became incorporated, and gained boards of directors. The enormous amount of nonperforming debt that was part of the greater Asian economic crisis in the late 1990s led to increased efforts at banking reform in China, including decentralizing the banking system and reforming nonbank financial institutions, especially the International Trust and Investment corporations or "itics" which had been eager to accept foreign investment for government projects. The government closure in 1998 of the Guangdong International Trust and Investment Company (GITIC), which defaulted on $1.6 billion, signaled a change in the government's policy toward support of investment institutions.

Other reforms in the 1990s included tax reform. In 1994 China did away with its two-currency system (one convertible and one not), which encouraged foreign investment. The Company Law was enacted at the end of 1993 to regulate activity in limited liability and joint stock limited companies. Entrepreneurial activity also grew, and by the end of the decade private businesses, virtually banned during the Maoist era, numbered more than I million according to the All-China Federation of Industry and Commerce, which oversees this sector. Private businesses are now considered an important component of the socialist market economy of China. When their employees are combined with those working in the tiny family-owned businesses, called geti (individual businesses), the total number of workers they employed in 1998 was close to 15 million, according to the State Statistical Bureau.

At its 50th anniversary the People's Republic of China faced several possible future scenarios. Rigid control by the government and the party with continued crackdowns on dissidents and social stability at all costs has been favored by Jiang. Passivity is another scenario, although economic pressures make this less likely. Regionalism is a third alternative: the great regional differences in economic development may lead to geographic schisms. Finally, a social eruption seems increasingly a likely possibility: an estimated 150 million are now looking for work but with low qualifications. They are increasingly restive as they see others enjoying great economic gains while many state employment opportunities have been closed. The central government in Beijing still faces the challenges of managing the enormous number of unemployed, eliminating rampant corruption, regulating the unevenness of the economic growth which has benefited the cities and coastal areas more than the poor interior, and building a legal system. The loss of authority by local cadres has weakened the government's control over population growth, which will be a serious problem for China's future. Another threat is the deterioration of the environment due to erosion and economic development, insufficient agricultural research, and inadequate pollution controls. The currency will likely range more freely from the U.S. dollar peg in the future.

HOW TO DO BUSINESS IN CHINA

Foreign direct investment (FDI) in China includes foreign equity joint ventures, foreign contractual joint ventures, wholly foreign-owned enterprises, and joint resource exploration. At the end of 1997, more than 21,000 foreign investment contracts had been approved, of which about 10 percent were U.S. FDI. This was down from a peak in 1994 of 6,750 contracts from the United States. Selling is done through a joint-venture partner whose business license allows sales within China, and sourcing in China—to be successful—involves a contract agreement with a Chinese partner in order to guarantee quality control and product availability. Many large PRC organizations have the authority to deal directly with foreign sellers, but most Chinese end users still must use a "foreign trade corporation" (FTC) to close the contract and import the desired goods into China.

The first step, if the goal is buying, selling, or forming a joint venture, is to identify a partner. The choice of a partner is extremely important. Chinese government commissions that approve foreign investment, such as the Shanghai Foreign Investment Commission, can provide lists of partners as well as ongoing assistance with the negotiations with that partner. Because China's organizations operate like vertical tubes or silos, few have any connection with any other enterprises outside their own silo, inside which communication flows upward to the government ministry or party agency or bureau that controls the particular industry. A visiting Chinese delegation member may speak plausibly about what his or her organization in China can do in partnership with a foreign company, but the foreign business must carefully assess whether or not this is the best possible partner in China for the Western firm. It is not easy to change partners and start again in China if an initial endeavor fails because the partner was not a good fit.

The next step is to find out about potential partners, and have one's own representatives meet with the Chinese in China. Good research is important. Key factors are the Chinese company's relationship with the government body that will approve the business license, relationships with the agencies and distribution system that will be necessary to carry out the operation, experience with foreign joint ventures, and capability in the business—including capitalization, distribution network, infrastructure in the site of operation, labor access, and a host of other concerns. Foreign firms do not usually have more than one partner for each project.

The third step for joint ventures involves four major documents. The first is a project proposal, which is prepared by the Chinese joint-venture partner and presented for approval to the Chinese authorities. Joint venture company names are subsequently applied for. Next is a feasibility study jointly prepared by the joint-venture partners, covering financing, site selection, technological process, equipment, raw material supply, market survey, economic results, foreign exchange balance, infrastructure facilities, etc. In some cases, an environmental impact study is part of this step. While doing the feasibility study, the partners may also draw up the contract and articles of association for approval by the Chinese authority. At this point it is very important to specify the steps for exiting from the joint venture, if such a move should prove desirable. Many companies have found entering into a joint-venture agreement in China is much easier, in spite of the bureaucratic steps involved, than exiting from a joint-venture agreement. When the approval is granted, the joint venture may apply for the company's identification code. The approval certificate is necessary before the appropriate authority will grant the business license, without which no foreign-invested operation in China can exist. Businesses must operate strictly within the scope specified in the business license, which must be renewed every year.

CHINESE LAW.

Foreign businesses will find an atmosphere of eager enthusiasm for entrepreneurial activity in China with few legal constraints. China's legal system is slowly beginning to develop, but is still in the early stages. The Company Law that went into effect in 1994 was the first of its kind since the establishment of the People's Republic of China in 1949. The Company Law governs all limited liability and joint stock companies, including those with foreign investment, although earlier legislation governing joint ventures takes precedence where provisions differ. Since 1994 various amendments and additions have been made, but the law is still being written.

ACCOUNTING.

Accounting practices are not universally alike in China, and the kind of organization—equity joint venture, cooperative joint venture, or wholly foreign-owned enterprise—will determine how the accounting is done. Foreign-investment manufacturing firms are not subject to import duty if their products are exported. Duty-free havens and free-trade zones exist to encourage manufacture-for-export by foreign-invested enterprises. Auditing is becoming more widely practiced.

MARKETING.

Marketing inside China is easier for foreign firms that are joint-venture partners of Chinese firms already involved in domestic marketing. Channels of distribution usually coincide with the governmental administrative regions. The absence of extensive transportation and telecommunication infrastructures limits development beyond a given region. Nevertheless, every region contains a large market. Consumer demand for commodities and services is great. Manufacturers can sell with little promotion, but at the same time name recognition is very important for the appeal to status that is a characteristic of Chinese consumers. Promotion strategies that are effective include advertising through billboards, print media, and television, and personal selling.

FINANCING.

Financing of foreign business in China may take several forms. Wholly foreign-owned enterprises usually export to a subsidiary or trading company in another country. The total investment in joint ventures is registered capital (equity) plus circulating funds (debt). Debt-equity ratios are published and conform to levels set by Beijing. The equity often comes from the foreign partner, and working capital from the Bank of China. In large projects, companies can go public. Some enterprises in China have successfully issued bonds, such as Shanghai Pinkerton Float Glass plant. Labor is not considered equity. When the contract is being negotiated each side typically inflates its contribution, and the Chinese inflation may be three to five times. In a cooperative joint venture, only items used specifically for production are duty free.

Another issue that is subject to negotiation is land use. Formerly Chinese negotiators claimed land as equity, but now that use is leased, negotiations address three ways land is acquired: (1) land was allocated by a government; (2) land was agreed as equity in an earlier joint venture, and now is subject to a renewal fee; and (3) land use is granted for a specific number of years at a rate set by the local land bureau in a land grant fee. The first two are not transferable. The third, the land grant, is transferable under the land use laws. Land is "cooked"—with infrastructure (gas, sewage, water, electricity) in place—or "raw."

MANAGEMENT.

For about 40 years, the CCP had considerable authority over management decisions regarding sourcing, planning, production scheduling, directing personnel, and other management tasks in industry and government. In the 1990s market factors played a larger role in decision making, but the decision-makers remained CCP members who worked within the established centralized system. After China's government introduced the notion of a "socialist free market" system in the 1990s, making manufacturing enterprises accountable for profit and loss, the CCP remained firmly in control. Party leaders are the managers, directors, and heads, and management in Chinese organizations is very closely aligned to CCP affiliation. If the CCP does not want a particular enterprise to fail (and exit the market), it will bolster it through funds transferred from a subsidiary set up for that purpose, or through some other means.

In foreign joint-venture operations, party leaders simply move over from the Chinese partner firm to occupy positions of responsibility in the new joint-venture enterprise. Typically, the Chinese side prefers to hold senior positions in human resources—since they do the hiring for the most part—and liaison with local authorities. The foreign side usually prefers to manage production and accounting functions, for quality and cost controls. Foreign firms discover that incentives encourage workers to perform well, but care must be taken when decisions are made to fire or lay off workers. In solely foreign-owned manufacturing firms, investors find they often have to provide benefits and services to employees that are unfamiliar: in the Special Economic Zones such as Shenzhen, for example, where many employees come from other provinces, firms must provide housing and meals for employees, among other benefits.

INTERCULTURAL COMMUNICATION.

While language is an obvious communication hurdle, culture can present great obstacles to communication. Successful management requires awareness, and some accommodation, of Chinese cultural priorities. Chinese culture is collectivist—group membership is long-term—and group consensus is important when decisions are made. Face is a key factor, both preserving face and giving face. Communication is often indirect, rather than straight to the point, in order to prevent someone from losing face. Indirectness is especially preferred when bad news has to be communicated. Because status is important, however, subordinates may be directed by superiors in a straightforward communication style. Once a relationship has been established, directness in communication may signal proximity in relationship. Compliments give face.

Chinese make direct eye contact when listening, and do not sustain eye contact when they are speaking. (Westerners usually do the opposite.) The Chinese respect age, and with age comes seniority in the hierarchy of an organization. Hierarchy is preserved by a strong preference for harmony in communication among coworkers. Dissenting views are couched in careful and respectful language, when they are aired at all. Communication with seniors is always respectful and never confrontational. A certain degree of formality and courtesy characterizes Chinese communication with foreigners. Visitors are treated with hospitality, and the Chinese host can lose face seriously if visitors complain about their treatment or criticize China. Women often hold important positions, but a woman by herself does not meet with a man or men unless in a public place.

Tasks are often performed simultaneously, rather than sequentially as in the West, and task-completion may be viewed as independent from the clock. An important goal at work is establishing and nurturing good relationships with people, specifically those in power. The workweek is generally 11 days every two weeks; in other words, people work every other Saturday. There are few national holidays; National Day (I October), New Year's Day (I January), Labor Day (I May), and the three-day Spring Festival (January-February). The Chinese observe no religious holidays, but many Chinese follow religious practices.

[ Linda Beamer ]

FURTHER READING:

Blackman, Carolyn. Negotiating China: Case Studies and Strategies. St. Leonards, Australia: Allen & Unwin, 1997.

Burstein, Daniel, and Ame deKeijzer. Big Dragon: China's Future What It Means for Business, the Economy, and the Global Order. New York: Simon & Schuster, 1998.

"China Internet Information Center." Available from www.china.org.cn .

"China Ministry of Foreign Trade and Commerce." Available from www.moftec.gov.cn .

"China 2000." Available from www.china2thou.com .

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