Yet another new China: U.S. firms better understand the Communist Party’s latest anti-corruption drive
October 5, 2014 12:00 AM
By Louis Schwartz
Before China joined the World Trade Organization, I spent many months in Beijing working for China’s State Council on a project to satisfy one of the WTO’s “transparency” requirements. I translated and published a comprehensive compendium of Chinese law in English. So I can attest to the sheer volume of Chinese law.
Nevertheless, despite the impressive number of laws promulgated since China’s reform era began in the late 1970s, China has earned a reputation as a country where rule of law is secondary to “guanxi” — the personal and political connections that have served as the dominant currency for doing business in China.
Under former Premier Wen Jiabao, whose 10-year term ended with the ascendancy of President Xi Jinping in 2012, guanxi was traded with particular vigor. Mr. Wen’s own family leveraged their connections to build a business empire reportedly valued at some $3 billion.
As a result, the “Chinese Way” of guanxi became an important component of success for foreign firms as well. The most connected middlemen were the ones on whom foreign firms relied to build their businesses in China.
In Chinese “good guanxi” does not delineate legal vs. illegal influence, but rather effective vs. ineffective. So, with eyes often averted, foreign companies frequently were content to entrust their operations to the purveyors of guanxi, seemingly unwilling or unable to appreciate or control how guanxi was acquired and used on their behalf.
The right relationships with Chinese officials, managers of state-owned enterprises and others often resulted in rapid growth and success in China. And so it became a way of life for foreign firms and the Chinese who guided them to be generous toward Chinese government officials and important people in state-owned enterprises.
They were wined and dined, showered with gifts, escorted on trips to the United States and more. It was the “more” that often would prove especially problematic — helping their children gain admission to schools and secure employment overseas, arranging for the payment of fees to entities controlled by family, friends and associates, and providing other things of more-than-token value.
In Asia, the story of U.S. decline has gained currency, especially since the economic collapse of 2008. Because China has grown to be the world’s second-largest economy in just one generation, a belief has taken hold that the Chinese Way now will shape the conduct of international business. We have become accustomed to a new narrative: The 21st century will be the Chinese Century, just as the 20th century was the American Century.
But a closer look reveals that, although China’s GDP is huge and still growing rapidly, its economic and social challenges are daunting. Casual observers are aware of the choking pollution, inefficient industries, tattered social safety net, lack of a robust innovation economy and glaring income inequality that China faces. These challenges in turn require China to make far-reaching changes to its development model if its economy and society are to advance beyond the middle-income station it has now reached.
For China to make these critical changes, the most important task of the Chinese Communist Party is to shore up its legitimacy by proving that the excesses of the Chinese Way — as practiced for a generation — no longer are acceptable. The ongoing anti-corruption campaign of the two-year-old presidency of Xi Jinping is crucial to this effort.
Now, weekly, the Chinese press reports on yet another prominent government official or state-enterprise manager being removed from office for “suspected serious violations of discipline and law” — the Chinese euphemism for corruption. Mr. Xi has promised to go after “tigers and flies” — both high- and low-ranking officials — and he has made good on that promise.
In a report published last month by the Xinhua News Agency, the central government boasts that since Mr. Xi took office, more than 50,000 investigations have been initiated involving nearly 70,000 officials at all levels of government and the Communist Party, at least 18,000 of whom have been disciplined.
A quintessentially Chinese statistic that was cited vividly illustrates the effectiveness of the central government campaign: Over the last year, the sale of shark-fin soup — a uniquely Chinese measure of conspicuous consumption — has declined by 70 percent!
With increasing frequency, foreign firms are being caught up in China anti-corruption investigations. In May, executives with GlaxoSmithKline were accused of funneling bribes to Chinese doctors and officials totaling hundreds of millions of dollars. Last month, GSK paid a fine of nearly $500 million and its former chief executive in China was convicted of bribery.
Also last month, the Communist Party’s Central Committee for Discipline and Inspection began investigations of a present and former manager of one of Volkswagen’s China joint ventures. And here in the United States, the Securities and Exchange Commission and the Justice Department are vigorously enforcing the Foreign Corrupt Practices Act, which prohibits U.S. companies from giving something of value to foreign officials in order to win business.
The case of a former Chinese colleague and the company he helped to flourish in China has been a high-profile example of the legal and business minefields that foreign firms now face in China.
This man came to the United States in the late 1980s in one of the first waves of Chinese who would study here and then pursue lucrative opportunities. With his assistance, the company developed a significant business in China. But now that the legal and business environment has changed, the former colleague, his former employer and the Chinese who benefited from associating with them are all under the scrutiny of both U.S. and Chinese agencies.
The moral of the story is that it is now imperative for foreign firms to carefully examine potential partners and proposed transactions, make sure they comply with the Foreign Corrupt Practices Act, institute accounting and financial-control systems that quickly detect red flags and train their staffs to understand the changed environment in which they now operate and the liability that their actions can create.
This is a tumultuous period in China. A new commitment to the rule of law is emerging which will create a more transparent business culture as China embarks on its next stage of development. Foreign firms that fail to recognize this do so at their peril.
Louis Schwartz is president of China Strategies LLC, a Pittsburgh-based consultancy that assists Chinese and Western corporations, nonprofits and government entities with trade, investment and economic development projects. He also is on the faculty of the University of Pittsburgh, where he has taught courses on law and development in China.
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