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For U.S. companies considering investments in China, whether they be joint ventures or Wholly-owned Foreign Enterprises (WOFE) one of the most difficult decisions is on where to locate the facility.  In making this decision there are a number of considerations to take into account that are unique to China.  If you are entering China with a joint-venture with a third country partner it is important to look at the composition of the industrial park you are investing in. If, for example, you have a JV with a Taiwanese partner you will want to avoid investing in an industrial park dominated by Taiwanese companies. The same goes for other countries but realistically, only Taiwan, South Korea and Singapore have enough investment in China to dominate certain parks. Why avoid parks such as those in Kunshan (”Little Taiwan”) near Shanghai? Because if you have a dispute with your JV partner and things start falling apart, the zone’s authorities are going to side with the Taiwanese partner and make life difficult for you. [Read more →]

If you have an office in China you will no doubt receive many faxes inviting you to be a VIP attendee of this or that conference or meeting.  These VIP sponsorship invitations have become quite a racket in China and are primarily perpetrated by government or semi-governmental organizations as a way to raise funds.  Organizations with names such as the “Chinese Academy of Global Trade and Economic Cooperation” will invite a number of Chinese Government officials to be their guests at these events and then sell “VIP sponsorships” to Chinese and foreign enterprises and even foreign embassies at rates of about RMB 20,000.  In exchange for sponsorship the VIP gets to give a speech at the conference.

So why do enterprises buy into these meaningless conferences?  Because they hope to make some connections with the Chinese officials that are feted at these events and because getting a photo of ones self giving a speech at an official-sounding conference burnishes ones CV.   The organizer, usually a government office in much need of cash, makes a profit off of selling speech-making slots on the agenda.

The actual events usually turn out to be mind-numbing marathons of desiccated speeches given by officials and wannabe officials intent upon not saying anything that could get them into trouble.  In many cases the organizers have made it easy on the audience by handing out verbatim copies of the speeches before the speaker gets up to the podium to read the speech word for word.  Have you ever noticed how many people in the audiences of official meetings in China are sleeping?

One such invitation I received recently offered me the following benefits if I would pay their Academy US$3,000 for VIP status:

1. Give a speech at the conference
2. Meet and take a group photo with national department leaders
3. Have a front seat in the opening ceremony
4. Participate in a reception party
5. To be a member of the “Executive Committee” of the conference
6. Individual special outstanding contribution award of national construction
7. 3 sets of VCD, bulletin, and record of my participation
8. VIP shuttle
9. One full page of coverage about you and your organization in the meeting publication
10. blah blah blah

As if there weren’t enough hazards to watch out for in China add this one to your list of things not to do.  Four U.S. citizens and residents of Puerto Rico have been in jail in Shanghai for over six weeks now - charged with trying to use counterfeit Chinese money.  The Governor of Puerto Rico is trying to help the four hapless businessmen.

Reportedly, the four men, visiting a trade show in Shanghai, exchanged US$1,000 at an unauthorized money changer who allegedly gave them counterfeit RMB for their U.S. dollars.  When the men tried to spend the money they were apprehended and charged with being counterfeiters.

Everyone who lives in China knows that counterfeit bills are fairly common.  That is why every-time you give a cashier a RMB100 note they examine it closely.  The mistake these Americans apparently made was exchanging their money at an unauthorized dealer - probably with promises of a better exchange rate.  Not only is that illegal but, guess what, these dealers can’t be trusted.  Chances of getting ripped off, and worse, are pretty high.

Of course, the Chinese authorities should know this and should know that these men are not counterfeiters - they were duped.  At the most, they should be charged with using an unauthorized exchange.  It’s ironic that the police here are using their energy to go after duped foreigners instead of going after the actual counterfeiters - who are everywhere and easy to catch.

If you were in any doubt about the heavy hand that the government has in the airline industry in China this article may clarify the situation for you.  If the government decides they want changes they can obviously get rid of the chairman of an airline and replace him with the chairman of a rival airline - as they have done.  The Chinese government also recently told the airlines to stop buying new planes.

Many readers find it hard to believe that foreign businesspeople in China are sometimes finding themselves barred by Chinese authorities from leaving China if they are involved in a civil case in the country.   This problem goes largely unreported because foreign companies are afraid to speak out because they fear retribution from Chinese authorities.  If you have experienced having your exit from China denied or being held hostage by corporate thugs please let us know.  We are particularly interested in hearing about how you may have been intercepted at the airport and by whom.

As discussed earlier in this blog Shanghai Scrap has done an excellent job of covering a news story involving an allegedly kidnapped British businessman.  For those of you who are not regularly reading Shanghai Scrap there is an update on this story here. 

From a business point of view it comes as quite a surprise to me that scrap exporters would be selling to Chinese importers on the basis of a 10% down contract.  While trust may have been built up over a period of months or years these terms are foolish and have obviously been taken advantage of by many of China’s scrap importers who are currently breaking contracts as the price of scrap falls.  Importers that contracted for barges full of scrap have been finding a number of ways to get out of contracts while the shipments are still on the high seas bound for China or accumulating demurrage charges in China’s ports.  The lesson for all is - don’t trust anybody in business - especially in countries with weak legal systems and a close connection between business and government (eg: China).

If you’ve been having difficulty getting your merger or acquisition in China approved maybe you aren’t using the right lawyer.   The SAIC recently confirmed the arrest of its Deputy Director General for Foreign Enterprise Registration Liu Wei.  He is being investigated for “economic crimes” which include bribes in connection with getting foreign M&A applications approved.

The Southern Weekend newspaper reports here details about the widening scandal involving foreign investment approval.  According to the report it all began around 1996 when MOFCOM spun off its legal department to form a law firm – the Great Wall Law Firm.  Since then the law firm would charge tens or hundreds of thousands of yuan to secure foreign investment project approval and then would pay off the officials approving the M&A project in the form of property and cars.  Foreign firms that did not utilize the Great Wall Law Firm did not succeed in their acquisition approval.  In other words, companies had to use the law firm that officials favored in order to have a successful application.

While this case plays out it is another illustration of the cozy relationship between regulatory agencies in China and favored private sector or state enterprise firms or their executives.  Many of the favored executives are former officials of the very agencies they now do business with.

From a practical business standpoint it pays to ask people in a regulatory agency one must do business with, who they recommend to handle the application.  It’s the job of government relations professionals to know these things but in China it is surprising how often foreign companies don’t do this due diligence.

When traveling to China, or to any other country for that matter, check out the U.S. Department of State’s travel advisory webpage here.   These are very useful but keep in mind that the advisories are general in nature and may not reflect the very latest events.

Adam Minter has a compelling story on his blog at Shanghai Scrap about a British businessman that was recently allegedly kidnapped by a subsidiary of a state-owned enterprise in Ningbo.  The story follows the general MO that I have earlier discussed in Uncle China.  In this case the Chinese company tried to take the foreigners passport away and prevent him from leaving Ningbo.  When the British man did sneak out of Ningbo he was apprehended, under the noses of authorities, at Shanghai’s Pudong Airport by kidnappers from the Ningbo company.  The British paid the ransom for their executive but have pulled out of an industry trade show in Beijing out of fear that the same will happen again.

The question I have is whether the Pudong Airport kidnappers were from the Ningbo company or were they from the economic police or have the support of the economic police (yes, China has “economic police”)?  The economic police from cities in Zhejiang Province have been alleged to do this sort of thing at Pudong Airport.  In fact Zhejiang has a pretty bad reputation for government inaction if not collusion on strong-arm tactics against foreign investors and business visitors to that province.  Nearby Jiangsu Province has a much better reputation among foreign businesses by the way.

This also brings up an interesting MO by Chinese companies that reportedly owe other people money.  When the party that is owed the money shows up  to collect, as the British fellow did, the Chinese will not simply deny they owe any money, they will immediately and aggressively go on the offense.  They believe very strongly that the best defense is a good offense.  Anyone trying to collect a debt in China needs to be ready to be set back on their heels, if not kidnapped.

In the midst of the current world financial crisis it is interesting that many are looking to China to save the world from slipping into a global recession.  Interesting also are the many pointed criticisms coming from China about the West’s financial irresponsibility.  One top Chinese state media official wrote that the crisis on Wall Street proves the superiority of China’s political system.  A friend of mine recently listened to a speaker at a financial forum in Shanghai condescendingly mock Wall Street and the U.S. system as a system China should not emulate.  The speaker’s comments were not translated to the foreign audience.

I’m in no mood to defend Wall Street or its equivalents in Europe and Asia but let me bring up a little known but salient matter that should be brought up whenever Chinese officials get on their high horse.  China is currently in default on about $260 billion worth of pre-1949 Chinese government bonds purchased by Americans alone.   At least 15,000 American families hold defaulted sovereign-backed bonds that were issued by pre-Communist governments of China.

Between 1900 and 1938, the Imperial and Nationalist governments of China, confronted by the need to raise capital to deal with dire domestic economic problems, issued tens of thousands of bearer bonds – valued at hundreds of millions of dollars – that were backed by the full faith and credit of the Chinese government.   It is well established, as a matter of international law, that a successor government is responsible for the payment of sovereign debt obligations of a predecessor government.  While China has, contrary to this international law, repudiated its obligations it has selectively acknowledged its obligations by making good on the bonds with citizens of certain countries.  It did so with British citizens in 1986 and is said to be in negotiations with France now.  For the background on the bond matter see the 2008 testimony before Congress of Jonna Z. Bianco, President of the American Bondholders Foundation.

An interesting point that Bianco makes is that China and numerous state-owned and controlled Chinese enterprises (“SOEs”) are currently in violation of disclosure requirements under U.S. securities laws. Numerous Chinese SOEs participate in U.S. capital markets and constitute “issuers” under the Securities Act of 1933.  They are prohibited from making disclosures to current and potential investors in filings with the Securities and Exchange Commission (“SEC”) that contain misstatements or omissions of material fact.  Information about outstanding defaults are routinely omitted from the SOE filings.  These filings would therefore seem to unlawfully contain omissions of material fact that are misleading to potential American investors.

So the next time a Chinese official ridicules the West for financial irresponsibility remind them of their own.