China Closes 66 Golf Courses and That Matters

China Law Enforcement

Since becoming China’s President about two years ago, Xi Jinping has consistently stressed rule by law. Even if you do not know exactly what that means (and I am not sure anyone does), it is damn clear he means it. And when I say that he means it, I mean he not only means it but he really believes it is of critical importance for China.

We can talk about why he believes this. Is it to maintain order? Is it out of fairness? Is it for philosophical or moral reasons? Is he just using it to crush his enemies? But that does not really matter. What matters — and I will say it again because this is important — is that he really means it.

I could write page after page giving you countless examples of why I know this to be true, and still not go beyond the last six months or so. But I won’t. I will instead provide four specific and telling examples from just the past month and start with one very general one.

The general one is that despite China’s slowing economy, the China lawyers at my firm have never been busier than in the last year and I mean by a wide margin. And I am convinced much of that business stems from foreign companies doing business in China realizing they need to figure out which of China’s laws apply to them and follow them. And that is what many of them are telling us. One client just the other day told me he has been in China for 20 years and he “has never seen anything like this,” referring to the scrutiny his business is getting from Chinese regulators and to what he knows to be happening to his domestic and foreign competitors in the same industry.

Now for the five specific examples, all of which happened in the last week:

1. News reports suggesting that Foxconn is having trouble securing investment benefits promised by the Zhengzhou government. The rumor is Foxconn was lured to Zhengzhou with promises of over 5 billion RMB in tax benefits and related incentives. These incentives were granted in direct opposition to central government policy. Beijing found out and laid down the law and now the Zhengzhou government is backing down. In other words, Beijing is enforcing a long-standing but often violated law, and doing so against one of the two or three largest foreign investors. For more on this, check out China FDI: Beware of Local Governments Bearing Gifts.

2. China this past week shut down 66 illegal golf courses. Everyone (even me, who proudly terminated his budding — okay so that’s a lie — golf career in a pique of frustration at least a decade ago) knew China had tons of illegal golf courses and nothing was being done about that. The “nothing being done” part is no longer true. Reuters describes these closures as “the first real sign of enforcement of a 2004 ban.”

3. Two reports from friends/consultants in China with whom our China lawyers have done substantial work. I am combining these two reports into one, both because they are so similar and so as to disguise any identities. These consultants reached out to our China attorneys on behalf of two of their clients who were just shut down this week in big cities for half their “employees” being off the grid. Both these companies had less than 10 off-the-grid workers and here’s the kicker — one of these companies is a Chinese domestic company. In both instances, the consultant had no idea why the closings were happening now.

4. Foreign company doing business in a small Chinese city as a WFOE is told by city officials that it needs to form a new WFOE because the scope of its existing one does not cover its operations. The funny thing is that this WFOE had been formed only a few years earlier with the help and at the direction of this same city. When asked what had changed, the city said “Beijing is looking at this sort of thing.” We have been warning of this for years but this is the first time I have heard of a city issuing this sort of order so much out of the blue. See Badly Formed China WFOEs are Dangerous.

5. Just this week, I personally received three phone calls from American companies wanting help figuring out how to get their Chinese investors’ money out of China. One was a real estate development company in the Midwest that has been expecting $2 million dollars each from two different Chinese investors and that money has not been cleared by China. The other two were from residential realtors in the Northwest who are working with China-based buyers whose funds have been blocked from leaving China. In both of these instances, the realtors told me they have heard China allows its citizens to transfer only $50,000 a year outside the country, but in the past Chinese home buyers have circumvented that rule by paying ten or twenty or thirty or more of their relatives and friends to each transfer $50,000 to the same bank account in the United States. Seems that all of a sudden China is stopping that and these people are not able to buy their U.S. houses and these realtors are not able to make the sale and get their commission. I

The common theme is that if you are a foreign company doing business in China, you need to get legal. And fast. China as Wild West — at least for foreign companies —  is no more.

What are you seeing out there?

5 responses to “China Closes 66 Golf Courses and That Matters”

  1. In my two decades in China, never have I seen anything like what’s happened over the last two years. From state media intentionally sabotaging foreign companies’ market share with attacks in the news thinly veiled as “hard news expose'” on Apple to meat suppliers it’s pretty sad to see. Apple has a policy in China different from other countries because unscrupulous types return fake iPhones and try to swap them out for real ones, the media conveniently ignores that tidbit of fact and waves the hater flag. With the meat suppliers the foreign company gets blamed for it’s middle management taking kick backs etc (something almost impossible to control when the deck is stacked against you.) I’ve even read reports that undercover reporters posing as employees threw meat on the ground and filmed legit staff picking it up…WTF? This lays waste to major western brands market share…ham-fisted? Definitely. Software companies being bullied for their source codes to car companies getting fined with anti-monopoly laws when they have a middling share…the pattern is clear and the vindictiveness is bitter. China tends to go through periods of opening up like a flower and then snapping shut like a venus fly trap…foreign flies be damned. The economy has slowed and the gloves have come off. Instead of reforming and allowing tariffs on imported goods to be shed fostering true competition and forcing local companies to improve quality and price, the rhetoric is ramped up and the attacks intensified… this isn’t how to build a consumer economy let alone a civil society ruled by law. Most of the “cleaning house on corruption” is a political purge plain and simple. To truly change things the entire system would have to be revamped by taking the power out of the system of “little red chops on your documents” that’s not going to happen because it would lead to a bunch of unemployed people. See the catch 22? That 15% growth over the last decade…pppffttt….its investment lead spending, their is so much empty property from residential to commercial in Shanghai that if it was released on to the market it would cause rents to crash and take the money out of the pockets of the “extended families” and a severe market correction would ensue…but hey…I’m just a guy that’s watched it all unfold over the last 20 years so what do I know? Yeah…I know if I don’t like it, I can leave” have heard that a million times when things are pointed out with a critical eye….

  2. Certainly agree. In my area the big issue at the moment is illegal construction. Some building projects are being suspended, half built factories are being knocked down. We have been caught up in it because the warehouse we wanted to rent has turned out to be illegal and the building has been stopped. The owner was saying it would be solved by April, now he is saying he has not idea when he can finish it. I doubt that he can.
    In every other area of our business we are seeing similar crackdowns. There is also a lot of arbitrary on-the-run policy shifting as the local authorities react to perceived requirements from above. There is no clarity and no definitive information to go on. They are just playing it by ear and the upshot is that we are finding harder than ever to focus on business.

  3. Perhaps not quite on point, yet not far, I’m informed of a couple of local generals [involved in supervising construction and purchasing] and vice presidents of universities [involved in both construction and admissions] being relieved of their job responsibilities, going to their offices, having their phones not ring,and doing nothing except waiting for forensic accountants to arrive with a list of questions regarding assets that will tighten their corrupt sphincters. They also seem to be on a form of home detention/house arrest. The reaction amongst teachers, students and others varies from satisfaction, through approval up to and including not quite gladness and one or two gleeful. I don’t think the investigators are having much trouble finding out who the corruptionists are as their corrupt ways have been observed, and resented and not really envied, by the honest, if not necessarily too-hard-working other members of the various institutions. If the political party that runs the country wants to stay in power then fierce anti-corruption is one avenue, a rather broad and smooth one at that. cheers.

  4. While this is good for your business, what does this say about investment in China, rule of law in China, and the very future of China?
    It seems as though Chinese money is pouring out of China, and foreign investment has halted. While being legal in China has always been necessary, China is unarguably targeting foreign firms, which undoubtedly is contributing to declining FDI in China.
    From a business and law perspective, what will China look like in ten years?
    If things continue as is, I would have never considered it, but I think the most favorable future for China under CCP rule is to be an irrelevant, economically neutered wasteland, ruled by a crazy shirtless joke like Russia…
    Is this China’s future, or is the recent occurrences in China just the very difficult transitional period in a nation with a bright future?

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