Good Guanxi Gone Bad

China MOU

Just had a discussion with one of my law firm’s international lawyers on what can go wrong by “cutting legal corners” in China. I frequently have this discussion with clients who want us to take a shortcut (usually one advised by someone who financially benefits from it) to speed things up or reduce costs.

The problem with the typical China shortcut is that it involves doing something not completely legally but with assurances that it will work because “someone knows someone” in such and such Chinese government agency and that someone will make sure it goes through without a hitch. Before I talk about the more mundane ways this sort of “guanxi” can end badly, I will talk about two rather graphic examples where the reliability of such connections ended up being very detrimental:

  • Many years ago, my law firm hired a paralegal whose father was a very powerful vice-governor in a province in an Eastern European country. For years, our clients got unnervingly quick approvals of just about anything they sought to do in this province. Then one day, someone murdered this vice-governor. Word was he had simply gotten too powerful. In any event, the new vice-governor was definitely from a different faction and one of the first things he did was go after anyone associated with the previous regime. He did not shut down those companies that had followed the law, but he did shut down those companies that had not. Our law firm’s quick approvals slowed down to a normal speed.
  • Many years ago, we had a client who had struck a deal to supply all of a product for a particular Asian country’s military. The deal was through the son of a very prominent, extremely high up government official. A few days into it, the son was arrested for corruption and the deal totally cratered.

The more mundane and certainly more common examples of good guanxi causing problems are the following:

  • Your “connection” manages to secure you a government approval to which you would not ordinarily be entitled. A few months later, your connection comes back to you saying that he is getting pressure from above and he is going to need money to keep them at bay. Your connection may keep coming back to you for a long long time.
  • Your “connection” gets fired, quits, or gets promoted. The replacement for your connection sees your improper approval and does something about it. This is incredibly common. Once or twice a year we get calls from companies whose China WFOE is being shut down under these circumstances.
  • Someone higher up than your “connection” sees your improper approval and does something about it. This higher-up could be in the same agency in the same city or might be in a regional center or even Beijing.

China is in the midst of an economic slowdown right now and that means foreigners and foreign companies are in the cross-hairs. This also means government officials are looking to diversify their funding sources. Companies that have cut corners are a great source of funding and Chinese government officials are going after them with renewed vigor.

So what are we saying here? Are we saying that having good connections is a bad thing? No. Are we saying that you should never use your connections to your advantage? No, we are not saying that either. What we are saying is that you should always be mindful of the risks inherent in sidestepping the law and you should always beware of how doing so can come back to bite you. Or to quote another China blogger [link no longer exists]: “Guanxi Either Retires or Goes to Jail.”

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