China Business

China’s Changing Worldview is Bad for Foreign Business

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In a recent article, China’s GDP growth likely to reach double digits again, [link no longer exists] Xinhua repeats another of the endless reports we here in China are constantly seeing projecting double digit growth for the Chinese economy for the mid and long term.

But the important thing about this article is not its prediction. The important thing is its underlying assumption that the U.S. and European economies are now irrelevant and the economies of China and India are now set now set to dominate the world:

“The U.S. economy will recover pretty slowly, and its contribution to the world’s economic growth is not nearly as important now as it used to be decades ago,” Quah said.

“The world economic center is gradually shifting from the U.S. and Europe to emerging countries like China and India, where the recovery pace is faster than developed countries,” he said.

A recent article in the Financial Times, Gold extends record high on India purchase, echoes this view. In reporting on recent purchases of gold by the Indian central bank, the Finance Minister of India is quote as saying:

Pranab Mukherjee, India’s finance minister, said the acquisition reflected the power of an economy that laid claim to the fifth-largest global foreign reserves: “We have money to buy gold. We have enough foreign exchange reserves.”

He contrasted India’s strength with weakness elsewhere: “Europe collapsed and North America collapsed.”

This is now the new paradigm for the governments of China and India. The U.S. and Europe are finished and the world belongs to them. It is irrelevant whether this is true. The key is this paradigm is believed by the governments of both countries. I experienced the same thing in Japan in the late 1980s, when Japan was convinced it would soon own the world and the U.S. and Europe were destined to fade away. We know what happened there.

This new confidence greatly impacts foreign companies entering the China market. The current attitude in China is that “you can come, but we really do not need you here. Our WTO obligations mean we will allow you to enter our market, but we are really not excited about that.” This blasé attitude is often a shock to our clients. It is something to prepare for, however, since the attitude seems to be pervasive and growing within the Chinese government and it is impacting how Chinese companies must conduct their business in China.

Where we are seeing the greatest impact from this new attitude is in the shutting down of illegal foreign businesses. Whereas in the past, foreign businesses caught operating in China illegally would usually be fined and given the opportunity to come clean by paying all back taxes, we have seen a distinct tightening in both enforcement and penalties just over the last six months. My co-blogger, Dan Harris, is always saying that if our law firm gets one report of something in China it is an isolated incident, two reports is a trend, and three reports is a fait accompli (he majored in French). We have gotten so many reports of foreign businesses being shut down in China this year I do not even know what to call it.

I do know, however, that I should point out the mistakes these companies made and talk a bit about what led to their problems. Two of these companies were registered in Hong Kong and they told us they thought their Hong Kong company registrations constituted registration on the Mainland. Their not so absurd argument was that Hong Kong is part of China, so why not? Ignoring the policy reasons (and ignoring the fact that being registered to do business in New Jersey does not make you registered to do business in Kentucky), the only answer is that registration in Hong Kong DOES NOT equal registration in China and if your business is not registered in China, you are operating here illegally.

One of the other companies was registered to do business in China, but as a representative office. It operated as a representative office for a year or so, but then realized it would do better having its product made in China and sold in China, rather than simply marketing the home office’s product for import into China. Within only a few months of its shift to its more profitable model, the government was at its door seeking back taxes and imposing large fines. This company was convinced its leading Chinese competitor had reported them to the authorities and I have every reason to believe this was true. Again, though, the key point here is that the Chinese government does not really care if you are here or not and if some Chinese company wants you gone and there is a legal basis for your exit, well, good luck.

I should say, however, that Chinese businesses do not generally share the government’s view towards foreign business, at least with respect to those with which they are not in direct competition. They have a much more complex, realistic, and business-like view of the world. It is the government regulators and “gatekeepers” of which we need to be on guard.

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