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?