Home -> Law Blog Directory -> International Law Blogs -> China Law Blog

International Law

: China Law Blog

Foreign Businesses In China And Illegality Per Se

By Dan Harris and Steve Dickinson

When I would judge mock trials at the University of Washington Law School. One of the things on which I always criticized the lawyers-to-be was for talking like a lawyer. I would ask if they described a guy getting out of a car as "a person descending from a vehicle" and before they started law school. Is "lawyer language" one of the reasons why everyone (except my dear mother) hates lawyers? This is my long handed way of apologizing for using Latin in the title, but I figure regular readers know I usually prefer Bob Dylan. But I digress. Knife Tricks blog has a post entitled, "Chinese Law Relating To Publishing By Foreigners: No, on my recent post on how foreign companies are allowed to operate illegally in China until the day they are not. As I said in that post:

The problem with operating a business illegally in China is that past history is simply not a good indicator of future performance. We know foreign businesses that have operated illegally in China for 15 years without a problem and we know other businesses in the very same industry that have been shut down within six months of beginning operations. And that is the problem with an illegal business: you just never know when the knock on the door is going to come and when it does, saying that you have gotten away with it for x number of years is no defense at all. There is little that can be done when you are on the wrong side of China's law.

Rich Kuslan of Asiabizblog makes an excellent comment on KnifeTricks' post and on foreign companies operating illegally in China. Rich rightly points out that it is not really the "illegality per se" that causes the government to shut down a company, it is almost always something else in addition to that:

Illegality per se is not the problem. In the case of publishing, the Party wants control. But over and above that, illegal enterprises are tolerated until they start to make money. Thereafter, the threat of shut down is costly to the founders. Heavies from government can then come in demanding a piece of the action -- or the whole thing, which others have paid for. Do you see how "illegality," as an American might understand it, does not really figure in here?

Rich is absolutely right. Foreign companies operating illegally in China are not shut down so much for operating illegally, rather, they are shut down because they are easy to shut down because they are operating illegally and nearly always because of some additional reason, including usually one of the following: 1. The foreign company might be operating in an industry where the government does not want foreign companies. Publishing is a great example of that. Foreign owned companies are not allowed to publish in China. An unregistered foreign company is not allowed to sell t-shirts in China either. Though both are illegal, the publishing business is clearly more likely to get closed. 2. Foreign companies operating illegally at great profit are at increased risk for shutdown. If you have a successful business in China and you are operating illegally, the chance you will anger someone in government (perhaps by not rewarding someone enough) or someone in your industry (perhaps by competing too well) are simply greater. Rich pointed this out and I agree. 3. Foreign companies operating illegally that make people unhappy are at greater risk of a shutdown. I am aware of too many shutdowns of foreign businesses after they fired an employee or had a dispute with a vendor to believe the government's knock at the door was wholly coincidental. Though all of the above increase your risk of getting shut down for operating illegally, the simplest solution (in those cases where a foreign company can operate legally in China) to avoiding getting closed is to get legal. It is usually a "plus factor" that causes a shutdown, not the illegality per se, but without the illegality, the "plus factor" standing alone is not likely to lead to your closure.

Full post as published by China Law Blog on July 02, 2008 (boomark / email).