Doing business in China

With an economy three times the size of the other BRIC countries (Brazil, Russia and India) added together, it’s not surprising that China is already home to 480 of the Fortune 500 companies. More than half of all these multinational companies say that China is critical to their global strategies.

Economic development has brought with it increasingly complex political, social and environmental challenges for the central government. As well as the problem of local protectionism, intellectual property violations and the government’s use of nationalism as a political and commercial tool, the age-old issue of corruption causes one of the biggest headaches for foreign businesses in China.

From an operational perspective, many executives see corruption in China as a cost of doing business there. Yet it is possible to do business in China without resorting to bribes – which is just as well, given the increasingly bright regulatory spotlight being directed at multinationals and their affiliates in China.

China ranked 72nd out of 180 nations profiled in the 2009 Corruption Perceptions Index published by Transparency International (with the most corrupt countries ranking most highly). Rapid economic development has benefited private entrepreneurs far more than it has government officials, while the privatisation of state assets has put numerous opportunities for graft within tempting reach of poorly paid bureaucrats.

At the same time, central government has decentralised much of the decision-making process for smaller investments, as well as legal and regulatory enforcement. Hidden costs present considerable challenges, often appearing in the form of 'fees'.

Making matters worse

Multinationals acquiring operations in China often discover that internal controls are weak, company records incomplete (particularly given high employee turnover rates) and the compliance environment not particularly robust. In many cases, concepts such as corporate governance, fiduciary duty and business ethics are poorly evolved. One multinational manager in Shanghai says: “The Chinese have being doing business with family and friends for hundreds of years, so they have further to go in terms of regulatory compliance.”

It should come as no surprise, then, that bribery in commercial dealings takes place. Making things worse are the actions of some multinational companies’ senior managers who, having a limited understanding of local conditions and the language, opt to leave operational decisions to their local managers.

The head of a Japanese manufacturing operation in China discovered that its most senior local manager was defrauding the company on a massive scale by selling surplus, reject and returned products in the market. In this case, the Japanese senior managers’ lack of facility in Chinese and English had forced them to rely too heavily on one individual within the company.

Unfortunately, if fraud is uncovered, the local legal system is not always of great assistance. China’s written laws are generally good, and the police are typically dedicated and “clean”, especially in big urban areas. However, interpretation of laws can vary dramatically from one jurisdiction to another and white-collar crime is not a high priority, while the judiciary has still to reach international standard.

The war against corruption

The government has fought a long-running war against corruption. Persistent and high-level corruption scandals prompted the ruling Communist Party of China’s leadership to set up National Bureau of Corruption Prevention (NBCP). The creation of the NBCP was in line with requirements set by the United Nations Convention Against Corruption (UNCAC). Beijing also published a Five-Year Plan (2008–12) for Building and Completing the System for Punishing and Preventing Corruption, and has tabled the Anti-Money Laundering Law and the Regulations on Disclosure of Government Information.

Furthermore, China’s membership of the World Trade Organisation since 2001 has increased transparency and reduced red tape. According to a World Bank report, Doing Business 2010, China came highest of all the BRIC countries in ease of doing business, ranking 89th out of 180 countries – ahead of Russia (120th), Brazil (129th) and India (133rd), but lagging behind regional neighbours Singapore (1st) and Japan (15th).

The backdrop for these tougher actions is the leadership’s concern that official corruption is eating away at the CPC’s legitimacy and standing in the eyes of the public. In a survey of nearly 50,000 people carried out by Xinhua before the 2009 annual session of the National People’s Congress (NPC), China’s parliament, over 75% named corruption as the most important issue facing the government.

International laws are also having a positive effect. The United States’ Foreign Corrupt Practices Act (FCPA), which outlaws bribery of government officials worldwide, is enjoying a new lease of life. The US Securities and Exchange Commission (SEC) is using it to fine companies that are registered, invested or listed in the United States for non-compliance in countries around the world.

As a result, more than 90% of US businesses are worried about the potential for FCPA violations while doing business in China, according to a report published by accounting firm Deloitte in 2009.

Tighter enforcement of Europe’s own anti-corruption legislation – notably the Paris-based OECD’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions – has also done much to eliminate corruption since its launch in 1999. Subsequent legislation such as the UK’s long overdue Bribery Act (2010), sets even more stringent standards for companies registered, invested or listed in the UK in their dealings around the world.

Speak out

The key to effective compliance is prevention. To comply with the FCPA companies should consider establishing corporate compliance programmes in a bid to raise awareness within their organisations and so minimise the risk of improper payments being made.

Most compliance programmes comprise two parts: a clear, concise corporate compliance document made available to all local staff (who should be tested for their knowledge of the guidelines); and training of all staff (particularly those in sales, marketing, distribution and accounts) to raise awareness of the principal compliance issues.

Many multinational companies operate global compliance lines as part of their regulatory obligations. Companies can launch awareness campaigns for 'speaking up', advertising the compliance line number on posters around the factory and offices, on credit-card size cards distributed to individual workers and on official receipts sent to the company’s partners and suppliers.

Chris Torrens is a China specialist at Control Risks and author of the book Doing Business in China: A guide to the risks and rewards