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China Business and Regulation: The Times They Are a Changing

changes in China laws

The Asia Business Media Blog just did a post, China’s attitude shift, on a James McGregor talk today in Hong Kong.

McGregor, a “journalist, media entrepreneur, investor and long-time resident of China gave a sobering talk” on how China is beginning to treat foreign businesses in its midst:

McGregor says that he loves both countries, but he thinks there has been an unsettling attitude shift in China recently. He believes that the arrogance that was once a less-than-appealing feature of U.S. businesses abroad has been adopted by the Chinese at an alarming rate.

Some of McGregor’s other observations included:

  • A belief in “exceptionalism,” which was once an American position, is now common amongst Chinese business leaders and officials.
  • More than ever before, Chinese authorities are moving to implement regulations to rig markets in favour of Chinese businesses. These regulations are designed to replace foreign businesses.
  • “Indigenous Innovation” is a policy gaining traction at all levels of government in China. McGregor notes however, encouraging innovation which is protected from global competition by a net of regulations is not a plan that is likely to succeed.
  • State-owned enterprises are enjoying a resurgence as Beijing has rediscovered its interest in maintaining an economic constituency that it can count on and control. Privately-owned Chinese businesses are beginning to feel they are at a disadvantage in their own country.

This is pretty much what we wrote at the beginning of this year:

With China being hailed as the world economy’s savior, its government has concludedthis is its century. The West is irrelevant and China will lead a vanguard of new players — and the game will be played by Beijing’s rules. Particularly in the area of trade and investment, China hopes to jettison the constraints of world trade law for a return to the policy of national interest and raw power. In this new world order, Beijing sees little need for foreign economic or technical assistance.

From the standpoint of foreign investors in China, this new self-image is already having a significant impact:

• Applications for wholly foreign owned enterprises (WFOEs) and joint ventures are more often being delayed or denied by demands for documents or capitalization not required by law. Officials openly state they are no longer interested in encouraging foreign investment.

• Registration of technology licenses is either prohibited or restricted in direct violation of law. The idea is that Chinese business should no longer be required to pay for access to foreign technology.

• Visas for foreign workers are increasingly being delayed, denied or restricted. The position is that Chinese workers are available to do any job.

• Investments in China used to be falsely profitable as foreigners qualified for tax breaks unavailable to domestic businesses while employment and wage rules were not enforced. This position has completely reversed. Chinese and foreign companies are expected to operate under exactly the same rules, making many foreign ventures unprofitable.

As China lawyers, we have certainly been “feeling it” as we have in the last few months encountered a number of instances where we filed applications/registrations 100% pursuant to Chinese law (and exactly as we have successfully done over the last few years) and some Chinese government officials are telling us to do more. And when we point out that we have already done everything required, we are told that doesn’t matter. We have yet to be denied anything in the end, but there is absolutely no doubt that the legal hoops foreign companies are being required to jump through in China have, in many instances, been raised.

Are you seeing the same thing?

9 responses to “China Business and Regulation: The Times They Are a Changing”

  1. The chickens are coming home to roost. You could see this coming 10 years ago. All the Chinese were interested in was technology transfer. We’ve been paying for what they make, they’ve been stealing what we make.
    After 10 years of theft, the US working and middle classes are hurting:
    This will lead to a major backlash in the next election cycle. Screw China.

  2. Definitely seeing the same thing at government level, but not necessarily from those across the negotiation table. I think many savvy business leaders still see business opportunities with foreign counterparts – especially in gaining technological know-how – but they are themselves feeling stifled by the shift.
    In the last 3-5 years, Chinese companies unsurprisingly have become less interested in foreign cash than in technology, but this stage of evolution has not yet been allowed to play out to its full extent. The Chinese would still benefit greatly from direct access to outside technology, even if they have to pay for it, and this is largely accepted within the Chinese business community.

  3. The irony here is bitter.
    After American firms spit in the faces of the American workers by splitting to China, they get the same treatment from their Chinese ‘hosts’.
    Who you gonna run to now?

  4. It is certainly a lot harder to do business in China for foreign companies now than it was just a few years ago, at least in the Internet sector. The time that you got a favorable treatment is certainly over. But I wonder if it is really only getting more difficult for foreign companies.
    I have a lot of Chinese friends running Internet companies that have exactly the same problems. The only difference is that they do not complain about it, but instead try to solve the problems they encounter. The good thing about China is that there is a solution for every problem, you just need to be a bit creative sometimes.

  5. One thing that I’m seeing which I think will have long term impact is a reverse brain-drain. Lots of skilled Chinese who ten years ago would have stayed in the US, are now packing up and going home.
    At the Chinese Finance Association, three years ago, the career talks were all on finding a job on Wall Street. Last year, the place was just flooded with Chinese companies looking for talent, and they can find the pick of the litter.

  6. Yeah…This shift has been in the making for about 5 years now. Officials began to worry that dominant foreign companies with innovation monopolies would storm in and corner the domestic markets, strangling out domestic competitors. They’ve been real clever about dangling the apple in front of foreign companies’ eyes, close enough that they’ll keep chasing it, but always somehow just out of reach. Who’d have thought back in the day that the almighty Google would get its butt handed to it by little old Baidu? I know we’re talking about different industries, but now watch the exact same thing happen to GM and maybe even Boeing. Or how about Microsoft, for so many years the victim of rampant software piracy, this year getting slapped with an IP violation for using a Chinese company’s font without a proper license?
    I’m not sure if you’ve seen these changes more in certain areas or if it’s a nationwide thing, but I think the government is trying to push foreign investors inland to less developed areas, leaving the lucrative markets along the coast to domestic competitors.
    The reality is that China is slowly becoming an expensive place to do business, with labor standards, regulations, and a legal system with some real teeth that operates heavily in favor of domestic entities. The plus side is that everything is becoming far more transparent. At least you know from the get-go what the laws are and that they will be enforced, instead of being treated like a king for years, until one day a new sheriff comes to town and drops the hammer of some “neibu” regulation that you never knew existed.
    I’m just surprised that people are acting surprised. For years, people have been begging the Chinese government to develop a mature legal system with rules that are actually enforced. No one would expect to be able to break into the US or European markets without having to jump through some legal or regulatory hoops. Now that China’s going to be the second largest economy in the world, the third-world-country benefits are starting to disappear. But, that’s what lawyers are for. This should be good for your business, no?

  7. The Chinese will only buy things they cannot do or make themselves. Once they take the technology transfer, the foreign entity is discarded. Pattern has been going on for years and will continue. Once they can make a 747, they won’t need Airbus or Boeing. Just wait, it’s coming

  8. AT: No one would expect to be able to break into the US or European markets without having to jump through some legal or regulatory hoops.
    For that matter, I don’t think any of the regulations that China has put on foreign companies are that much out of line with the sorts of regulations that the US and Europe have put on Chinese companies.
    One other point is that before people talk about how unfair it has been for China to “steal” US technology, let me point out that for the last twenty years the science and technology infrastructure of the US has been driven in large part by Chinese graduate students going to US schools. If you go into the graduate schools of any US university, you’ll see lots and lots of Chinese faces, and surprisingly few Caucasian ones, and one thing that US research universities have to start seriously worrying about is if China starts developing competitive research universities so that people don’t feel that they have to go to the US for graduate school. (Fortunately, there will be at least a decade or two before this happens.)
    So you have to be careful about talking about foreigners stealing “our” technology since the technology was probably developed my some Chinese or Indian graduate student in the first place. Go into any high tech company, and I think you’ll be a little shocked at how few “native born” people there are.
    AT: I’m just surprised that people are acting surprised. For years, people have been begging the Chinese government to develop a mature legal system with rules that are actually enforced.
    Be careful what you wish for since you might actually get it.

  9. With regards to Twofish’s statements, he is dead on about our technology no longer being developed by westerners. I’ve always felt that while we of course should welcome foreign talent, we should never be this dependent on it (of course by this I mean encouraging our own people to go into science and engineering, not locking out foreigners or such protectionism). What about when they don’t want to stay in the US? Now that increasing numbers of Chinese students are choosing not to stay in the US, we’re going to find out the result. The trend is small now and it will take time for it to grow large enough to have a major impact, but the tend is definitely there to our detriment.

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