Doing business in China...do it somewhere else!

I read this article in the (unlinkable) South China Morning Post written by veteran China watcher Laurence Brahm, a "political economist, lawyer, investment strategist and documentary filmmaker by profession and avocation." I wanted to share this article with my readers as I get quite a few emails regarding such matters and can't stress enough the risks and pitfalls that are part of doing business in China.

Three or four years ago, when I was toiling in the telecom business in Canada, I dreamed of going to China that "1.2 billion person market", learning putonghua and perhaps starting up some kind of business, just like many other overseas Chinese I know who had done so. When I got there, looked around and talked to locals what I learned frightened me. How businesses in China operate and what they have to do to survive all go against my personal morals, ethics and beliefs.

Not only did I decide not to pursue business opportunities in China, I have also shied away from buying property and investing in its stock markets (Shenzhen and Shanghai..HK is legit). Every time I read an article about the wonders of the fast growing Chinese economy, I am bewildered just how, with what we know how the Chinese government and businesses work, can the economy grow nearly 10% a year for the past 20 years in these conditions. This party won't last forever will it? The bigger they are, the harder they fall perhaps? I welcome your comments. Enjoy.

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Tuesday, September 12, 2006
The boom in extortion
Laurence Brahm

The contractor ordered his workers not to leave the building site. So they stood there, wielding iron pikes and tools in a menacing way. The "cement" they had laid was simply dirt. "Brick walls" could be pushed over with just a shove. The quality of all the materials used was substandard. The property owner had no option but to fire the contractor. But the contractor refused to leave.

This is the game played by many contractors in mainland China: use substandard materials, shoddy workmanship and unacceptable quality throughout.

When the owner complains, demand more money. There seems to be a direct relationship between the extent of the mess made at the work site and the size of the extortionate payout demanded. When the owner does not pay up, demand even more money. Arm your workers with potentially dangerous tools and hold the property for ransom. This puts the owner in a hopeless position.

"I sent my thugs into a building this afternoon to smash everything," laughed one contractor as he stepped into the private banqueting room of a major Beijing hotel. It is owned by the municipal government and used as a key carousing centre for city leaders.

"The Singapore developer who owns the building does not understand our real situation in Beijing, so we need to teach him a lesson as a prerequisite to further co-operation," chuckled the contractor. Then he and his female "companion" sat down to a fancy dinner of abalone and shark's fin soup with a group of urban mafia fathers.

Meanwhile, the capital is dotted with cement skeletons of property developments delayed by one problem or another. Some languish for years as a testament to the rules of doing business with "Chinese characteristics". Such are the costs of doing business in an environment where extortion itself is a key business sector. This racket is supported by a legal vacuum: there is no way to have someone thrown off your property. The police will do nothing. Unless a murder is committed on the site, such cases are dumped into the category of "economy dispute" - which excuses the police from getting involved.

The courts can be bribed. They often decide cases in favour of the highest-paying party, or the one with the most local contacts. The only other option is negotiation.

"Oh, mafia contractors have occupied your property?" shrugged one local chief of police. "Since you have trees on your property, contact the forestry department if you need help. Since you have water running through your property, contact the water bureau." This makes as much sense as reporting a stolen computer to the Ministry of Information Industry. That's how bad the legal administration is under the current system.

The term "economic dispute" is hopelessly broad in nature: it can be applied to virtually any sort of quarrel. Anyone who claims they have occupied someone else's property on that basis cannot be removed or arrested. This leaves local police with the freedom to smoke cigarettes all day and drink all night while racketeers occupy the property of innocent civilians, extorting their money.

In one of the mainland's major coastal cities, a potential condominium buyer complained to her agent that the price of a luxury apartment unit was simply too high. The agent smirked and said: "I have relations with the local district water bureau. We will just get them to cut off the water supply to that apartment complex for a few days: believe me, the prices will drop pretty fast.

"Then you can negotiate on your terms. This is what we call doing business with `Chinese characteristics'." There's another term that is open to the broadest of interpretations.
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Until we (as foreigners) figure out and get rid of these 'Chinese characteristics"-and we will get rid of them if China is to fully integrate into the global social/economic community-China will continue to be a place that is fraught with corruption, unfair competition and dodgy business.