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Doing Business in China

J. Stapleton Roy, managing director, Kissinger and Associates, Inc.;John Frisbie, president, U.S-China Business Council;Jerome A. Cohen, partner, Paul, Weiss, Rifkind, Wharton & Garrison; Audry Li, partner, Concord & Partners, Shanghai;Nicholas Howson, University of Michigan Law School;Mary Gallagher, University of Michigan;Roy Sheldon, former vice president & director, Staff Operations for Emerging Markets, ITT Industries;Kurt Reisenberg, managing director, Corporate Executive Board;Alisha Morgan, practice manager, Corporate Executive Board;Steven Xiang, managing partner, Weil Gotshal & Manges, Shanghai;Clarence Kwan, national managing partner, U.S./Chinese Services Group, Deloitte & Touche LLP.

Date & Time

Monday
Jul. 25, 2005
9:00am – 5:00pm ET

Overview

China's stunning record of economic growth over the last 25 years has posed attractive opportunities to foreign businesspeople. Doing business in China inevitably involves issues such as dispute settlement, legal environment, risk management, labor, and compliance. To access the opportunities and challenges of doing business in China, the Woodrow Wilson Center's Asia Program hosted a two-day workshop on July 25-26.

Roy, U.S. ambassador in Beijing in the 1990s, argued that China has revised its earlier Marxist-Leninist-Maoist ideology almost beyond recognition, and shown a remarkable ability to harness market forces to achieve rapid economic development. Despite a growing tendency in the United States to view a stronger China as an emerging military threat, overall U.S.-China relations are in much better shape than most observers anticipated at the beginning of the George W. Bush presidency. The problems looming ahead in the bilateral relationship are formidable, but they are not beyond the power of wise policymakers to manage.

Frisbie pointed out that China's WTO entry has dramatically changed the business climate in that country, with significant tariff cuts, merger and acquisition (M&A) relaxation and service openings. From 2001 to 2004, U.S. imports from China grew 92 percent, and exports to China increased 81 percent, compared with 46 percent and 34 percent increases, respectively, between 1998 and 2001. Meanwhile, wholly foreign-owned enterprises have increased significantly. Frisbie maintained that foreign investors should understand comprehensively China's market and regulations before rushing into that country's unique investment environment.

Cohen examined the role of the China International Economic & Trade Arbitration Commission (CIETAC) in settling business disputes between foreign investors and Chinese companies. Based on his earlier experience in China during the 1980s, Cohen had believed the CIETAC was able to deliver fair verdicts for foreign companies embroiled in business disputes with local partners. However, he fears now that the credibility of China's leading arbitration institution will slip away. For example, CIETAC continues to appoint its own personnel as arbitrators, especially presiding arbitrators. Although CIETAC's newly-revised rules for the first time permit a party to appoint an arbitrator who is not listed on the panel of arbitrators provided by the commission, opaque internal proceedings of CIETAC do not ensure just arbitration in China.

Li discussed China's legal framework by analyzing Chinese and international laws practiced in that country. According to her, Chinese law can be interpreted flexibly, and is less predictable. In contrast, international laws are specified clearly. Li also examined different types of business dispute resolution in China, including negotiation, conciliation, arbitration and litigation, and argued that arbitration is an efficient, convenient, cost effective, and enforceable way to resolve disputes.

Howson analyzed China's legal reform program since 1979 and found China is still both an administrative law state and a developing socialist market economy. Given the tension between market actors under rule of law and political actors exercising power, he strongly urged foreign investors to conform to China's published laws and regulations. While foreigners should marshal political support and give Chinese participants a stake in business deals, they should not initiate a transaction depending solely or primarily upon political and other personal connections.

Gallagher explored China's labor issues against the background of two transitions—from plan to market, and from farm to factory. These transitions, according to her, have increased labor mobility and flexibility, reduced social welfare burdens of state firms, and increased attention to social safety and occupational health/safety issues. Because employees are more aware of their legal rights and growing media coverage of labor disputes, intra-enterprise mediation has declined rapidly in recent years, and been replaced by compulsory arbitration and civil court litigation. Foreign companies in China, according to Gallagher, should build up internal enterprise rules and regulations for human resources.

Sheldon argued that compliance in China has changed at a world class pace, with regulations becoming more transparent and universal, moving toward equal footing for both Chinese and foreign owned entities. To ensure best compliance, foreign investors should establish clearly defined company codes of conduct as an integral part of the company's culture and business objectives. For start ups, company veterans are critical in key functions such as general management, finance, human resources, environment, safety, and health.

Reisenberg presented several lessons in expanding business and managing enterprise risk in China. These lessons include: 1) be cognizant of hidden operational costs, 2) look beyond the consumer market, 3) align the market entry strategy with specific product and market goals, 4) emphasize due diligence and ongoing partner oversight when working with Chinese partners, 5) develop government relationships at both the central and local levels, 6) implement a cash repatriation strategy at the outset, and 7) adopt multiple layers of intellectual property protection.

Morgan echoed Reisenberg's arguments when offering her commentary.

Xiang discussed recent trends in M&A transactions in China. According to him, the process of M&A has involved different types of enterprises, including state-owned enterprise (SOE), foreign-invested enterprises (FIE), and Chinese private enterprises. A new development in M&A transactions is from in-bound to out-bound investments and acquisitions. Xiang warned that buying enterprises that have state capital, however marginal, will considerably complicate the transaction.

Kwan argued that the Chinese legal and regulatory system creates opportunities but imposes real constraints, and China's under-developed infrastructure is strained by rapid growth. To create value in China, a company must understand China's business environment and anticipate the direction of change. It must adapt its strategy, structure, people and processes to the China environment. Kwan also highlighted cultural and social factors influencing business decision-making—while business people in Western countries take legality as a priority, followed by reasonableness and then relationships, their Chinese counterparts consider relationships more important than reasonableness or legality.

These remarks by China specialists stimulated heated discussions during the two-day workshop. While workshop participants recognized China's many problems, they agreed that China is a growing market with dramatic business opportunities. Doing business in China requires first-hand and up-to-date knowledge of that country, given China's size, geographical disparity, and continual change.

Drafted by Gang Lin, Asia Program Associate
Robert M. Hathaway, Director, Asia Program
Ph: (202) 691-4020

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Indo-Pacific Program

The Indo-Pacific Program promotes policy debate and intellectual discussions on US interests in the Asia-Pacific as well as political, economic, security, and social issues relating to the world’s most populous and economically dynamic region.   Read more

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