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Google, Rio Tinto And The State Of Business In China.

By Dan Harris and Steve Dickinson

I am trying to see how many posts I can do with Google and Rio Tinto in the title, despite my earlier claims that neither of those matters are terribly relevant to doing business in China. Though the media views those matters as signaling a sea-change in China, I simply view them as part of China's natural progression and well within its normal ebb and flow. Yesterday, I discussed this in the context of an interview with Michael McCune of the China Business Network on the state of Chinese law, as applied to business. The interview is entitled, "The Rule of Business Law in China," and it started with my limiting the discussion to laws relating to business and my emphasizing that in that arena the rule of law in China is actually improving:

MCCUNE: Dan, it seems like a good time to talk about the rule of law in China. I know it is a big topic, but in the wake of some headline-grabbing cases and actions, maybe you can do some level-setting for the company who is about to establish an operation in China. Can you put today's legal climate in context for us? HARRIS: Sure. The first thing I'll do though is limit the discussion to business law in China. People talk about rule of law and it includes criminal law and business law, but I'm only going to talk about business law because my knowledge of Chinese criminal law is minimal. Putting everything into context - it's a little bit funny to do it today in light of the Google case and the Rio Tinto case. The reality is that China's business laws are getting better all the time. MCCUNE: Let's think about that. For somebody coming in now to put an operation on the ground, be that manufacturing or service oriented, they're in a very different legal context than even a decade ago in terms of both rules, regulations and laws on the books as well as the ability to enforce or adjudicate those cases. HARRIS: That's absolutely right, and part of the reason there's been so much consternation lately regarding China's business laws is not because they're arbitrary, not because they're bad, and even not because they're being enforced unfairly, but because they now have them and they are being enforced. A lot of smaller foreign companies that were used to skirting the law or ignoring the law are now being cracked down upon and cracked down upon very hard.

We then talked about how the "gray areas" of China law are decreasing:

MCCUNE: I want to bring up the phrase that used to be talked about quite freely in the 90s and early 2000s, which is to say: "Not legal doesn't mean illegal." So if you didn't see a law on the books that expressly forbade you, it didn't mean that you couldn't do it, it just meant that maybe there hadn't been a law yet. That provided a gray area which some people saw as opportunity and for others, it created great discomfort. Nevertheless, subjectivity seemed to be the rule. Are there still a lot of gray areas? HARRIS: I don't think there are a lot of gray areas. I mean, there are always going to be some gray areas, but I think today the gray areas are grossly exaggerated. I think they're grossly exaggerated by companies that have been caught and then say "oh how was I supposed to know, it was a gray area." Well, it wasn't a gray area. The other reason I think so many people talk about gray areas is because the laws are gray to them because they're reading bad translations of them. For people who are reading the laws in Chinese, they're not so gray. The reality is a lot of China's business laws are extremely clear and extremely well written. However, China does have a tendency to enact laws and say that they're going to issue regulations that will really explain the laws and then when they cannot get a real consensus on the regulations, there will be this period where there can be incredible uncertainty because there will be a law that's very general, and the regulations which are supposed to tell us what we're supposed to do in specific instances, are slow to come out. Although in the last 6 months, even in that, it seems China's getting a lot better than they were two or three years ago. So this idea, "do whatever you want and see what happens" - that's generally not a good idea. Overall China's business laws are pretty much there. It doesn't mean they can't use improvement across the board, but it's become a fairly sophisticated system of commercial laws now.

Andrew Hupert of China Solved fame, has a post up on China Economic Review that says fairly similar things on the straight business front. Andrew's post is entitled, "China's negotiating environment has changed - but it's just different, not (always) worse." Andrew's thesis, with which I wholeheartedly agree, is that things have gotten tougher for business in China, but not impossible, and really not any tougher than one should have expected. Andrew starts out by noting that we were only half right in thinking that as China became wealthier, they would become more like us:

Engagement has been the basic tenet of US-China negotiation for the last 30 years. The idea was that as China opened to the rest of the world, it would start to align its systems, interests and priorities with international norms. Yes, it sounds funny and condescending now - but as recently as the mid-1990s China had to deal with annual Most Favored Nation trade status debates in Washington, DC. (We've all forgotten about that, but Beijing hasn't.) For Westerners, the core of engagement is that "They" become more like "Us" when They finally stop being so poor. It's not a failed policy - but it is an outdated one. China and US counter-parties are much more similar in terms of values and priorities than they were in, say, 1987. But for Westerners making deals in China, our negotiating environment isn't nearly as favorable as it was in 2007 - and it is unlikely to be again.

He then makes what I see as the key point, which is that the boom of the 2000s was the aberration and the present period right now should be viewed as the norm:

International deal-makers in China got a little spoiled in the decade before the Crash. The boom of the 2000s was doubly good for MNCs opening and expanding businesses on the mainland. Big consumption in the West was great - but China's internal economic policy-making gave a big boost as well. China Inc wanted to upgrade in a hurry, there was plenty of low-hanging fruit for investors with technology or brands, and the Chinese middle class still found big-picture images of international-style affluence both appealing and transferable.

And then, in Andrew's inimitable style, he tells us how we now need to return to "basics" and how what remains of the gray in China business should now be viewed as a "no":

Post-Engagement negotiating is more old-school than the pre-crash love-fests, where everything was possible but nothing was easy. Now some things will be easy and many things will just be impossible. We don't sit down to negotiate with purely private counter-parties anymore - there is policy in every deal. From here on in, sometimes NO really means NO. Westerners have grown used to having access to a wide range of industries and markets. In the old days there was a list of pillar industries (off-limits), encouraged industries (high-tech) and a wide swathe of "not disapproved" gray areas. For a decade or so, Westerners assumed that the gray could eventually be turned into profitable green. That is becoming a less good assumption. China Inc's unofficial view is that some Western brands and technologies are definitely less equal than others.

For more on this, check out the following: -- Google, Rio Tinto And The Truth About China FDI. BTW, They Are Not Even Really Related. -- A Google-China Cheat Sheet. Rio Tinto. Rio Tinto. Rio Tinto. -- Google, China, And Free Speech For Those Who Actually Give A Damn. -- China Law Blog's Media Tour. Power Lunch For Breakfast.

Full post as published by China Law Blog on April 01, 2010 (boomark / email).