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China Business/Investment Law And Child Rearing: A Lot Of Gray

By Dan Harris and Steve Dickinson

China Vortex did an interesting post on how foreign companies do and should react to Chinese laws. The post is entitled, "Working the Gray Areas in China," and it starts out quoting "Chinese entrepreneurs" saying that if they were to wait until the Chinese government said they could do something, they would never be able to make money. It goes on to say that Americans and Europeans in China "go out of their way to make sure that every 'i' is dotted and every 't' is crossed in all their legal arrangements with the Chinese government. Each executive is effectively protecting himself from litigation and any bad news from the Chinese government." The gray in the title should apply to both the gaps in the law and to what happens to one's hair when operating outside the black and white lines. Yes and no. Yes for publicly traded companies, at least in my experience. They generally cannot afford to have a problem in China that stems from their having acted illegally. We have a publicly traded company that has been waiting two years for a Chinese law to change, while in the meantime, it just waits, with a representative office that, near as I can tell, does absolutely nothing. This company can afford to wait but it cannot afford to fail. On the other hand though, we have a number of clients who are quite willing to move in advance of Chinese laws, even though, in our job as attorneys, we have told them quite explicitly and (always) in writing that what they are doing either does not comply with Chinese laws or very well may be out of compliance. These companies tell us, again quite explicitly, that they fully understand, but they cannot afford to wait. Some of them have even made assessments detailing how long they have to operate without getting shut down to make it worth their while. Just as Paul points out, we see much of this in fast moving industries:

In China, there are many areas which are not strictly illegal, but they?re not legal either. Most of the time, these involve fields which are too new for the government to regulate. Any government is a slow-moving giant; they are not renowned for their quickness and being smart. In this business ecosystem, the advantage lies with the fast-moving entrepreneur who can identify a need and move in quickly.

China Vortex analogizes these illegal companies to the creative and imagnaitive child who sometimes stays out late:

It?s a little like being a parent; who do you love more, the loyal son who does everything you say but is not creative and imaginative, or the smart son who sometimes frustrates you by coming home late, but is brimming with all kinds of insights and creative ideas and dates all the smart beautiful girls?

He then says that the Chinese government likes "the smart and sometimes naughty son" until "he gets too smart for his own good, in which case they smack him down." My view (based on what has happened with our own clients and with my youngest daughter) is that it is not so much a case of like or dislike, but once caught, the smack-down MUST and does occur. We are working with one client now who was literally told to leave town, but he is reluctant to do so because the profits just keep on coming.

Full post as published by China Law Blog on March 28, 2008 (boomark / email).