Laws, regulation and risk’s in China: the end of guanxi?
By Erik van der Molen - Kneppelhout en Korthals
Since Xi Jinping took charge as president of China he has been much in the spotlight with his strict anti-corruption policy. While there might be multiple motives behind this this campaign – according to some critics it is merely used as a means to strengthen his position of power within the Party-, I think this anti-corruption clearly fits in the wider framework of further development of the rule of law, which he has designated as one of the four guiding principles of his current administration.
It’s not for nothing that the development of a ‘socialist rule of law with Chinese characteristics’ (although the Chinese – yīfǎzhìguó – could also be translated as ‘rule by law’) was one the main themes of the last party congress in October. Whatever one might think about Xi Jinping and his leadership style, one of the main goals he has set for his time in office is the reform of public administration: better and clearer rules with a stricter and more transparent enforcement. With as one of the most important characteristics more control from central government level and less leeway for local governments for creative interpretation of the rule. The recent anti-corruption campaign is just one example of this wider drive for reform.
But what does all of this mean for companies that want to do business, or more importantly, are already in China with an establishment? Until now, there has always been a lot of criticism of laws and regulation lacking clarity, enforcement of the rules being haphazard at best, with a lack of transparency and not infrequently biased. You would expect therefore that foreign invested companies would welcome the current government plans to bring change.
Stricter compliance
One of the results of the last party congress will be stricter control and monitoring on the influencing of local courts by local party executives. Also plans for an additional level of circuit courts under the Supreme People’s court have been laid aid out. Earlier already the government moved forward on establishing specialized courts for Intellectual Property related cases.
In the long term, this of course is a positive development. An unambiguous system of laws and regulations that is enforced consistently and transparently offers stability and can only be beneficial for investments.
In the short term however, this means that companies that already have a presence in China or do business there, should urgently ask themselves whether their activities in China are still in compliance with the law.
It is important to realize that the new government policy is actually already visible in many areas. Of course as already mentioned in relation to corruption, but also in the areas of labour laws, taxes, accounting, immigration and environmental regulations. Corruption of course always has been illegal, but unfortunately many companies, including many foreign companies have never taken too much issue with bribing or facility payment, whether directly or through an intermediary, and often manager at HQ do not really want to know how their local managers or representatives get their orders as long there are orders. Monitoring and enforcement will only increase, so this means for all companies that is time to move from words to actions in terms of CSR and compliancy and set up stricter internal monitoring and compliancy rules. Recent scandals such as with GlaxoSmithKline paint a clear picture of what can be the consequences if this is not done.
Foreign companies are easy targets
The tax agency has also intensified control in order to increase revenues, and are known for specifically targeting foreign companies, expats and Chinese national with foreign incomes. Also this is an area where many expats and local managers have had little reserve to do some creative filing as guanxi with local tax authorities were good and control hardly there. Regulations have become stricter and monitoring is increasing in all areas and foreign companies are easy targets for government agencies to start with and score some points.
Companies with a presence in China such as a representative office, WFOE or Joint Venture will also need to ask themselves whether their activities are still in accordance with the activities for which the permit is issues, and whether they are initiating activities that fall outside the scope of allowed activities of a representative. In this area also enforcement has become stricter.
An additional problem of the current drive for reform is that, although the goal is to create unambiguous rules, in reality at present often there is still room for interpretation, as not every that is currently being implemented in rapid succession has been thoroughly thought through. An example is the newest immigration law reforms which has led to quite some confusion as to which visa-category should be applied to a certain situation. That however doesn’t change the fact that control is increasing. A number of foreign multinationals have been raided and have seen interns deported because they were there without the right papers.
Therefore companies can face considerable risk if they not take all of the above in to account, ranging from considerable fines, deportation, suspension of activities, passport confiscation, even to incarceration.
Public Administration in transition
To summarize, we can say that China’s public administration and its legal system is in a state of transition. The old China in which rules were vague, monitoring infrequent and contracts had little use because they could not be enforced, and public officials could only be moved either through bribes or Guanxi, has been disappearing for a while now, but this process has accelerated rapidly since Xi Jinping took charge. Having good Guanxi with local governments and agencies will always remain important but it is no longer an excuse or means to circumvent or ignore the laws
This means that doing business in China will gradually become easier and more transparent, but also that the risk of not complying with laws and regulation is a lot higher than before. For many companies this means a change of culture is required in the way business is conducted in, and with, China. For every company with a presence in China, this is therefore the moment to really scrutinize activities, internal guidelines, certificates, CSR-policies, bookkeeping and contracts.