China's legal renaissance sounds death knell for Guanxi

Updated: 2014-10-26 16:03


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BEIJING - As the curtain fell on a key meeting on rule of law on Thursday, Israeli Yuval Golan, 29, felt good about his business prospects in what should be a more transparent and predictable China.

As CEO of Unique 1 Asia Creative Business Consulting Co. in Haikou, capital of south China's Hainan Province, Yuval was recently recognized by the province for cross-border economic and cultural exchanges and for creating local jobs.

Despite the award, Yuval has plenty of gripes and complaints about doing business in China. He wants approvals and dispute settlement to be dealt with in a way that he would recognize as fair and just.

The end of an era

According to the 2014 Business Climate Survey among members of the American Chamber of Commerce in China, inconsistent or unclear laws and regulations have been one of the top three business challenges over the last five years.

The regulatory environment has changed drastically in two decades as legislation has struggled to keep pace with the rapidly evolving economy. Understanding and navigating this legal labyrinth is a major headache for AmCham China members.

About ten years ago, foreign business got their advice basically from one book, "One Billion Customers: Lessons From the Front Lines of Doing Business in China" by James McGregor.

The bestseller, once the "bible" for anybody doing business in China, advised businessmen to pull whatever strings they could to evade local laws and regulations as "rule by law" instead of "rule of law" was the norm in a country obsessed by social connections.

Applying McGregor's dubious wisdom today could be fatally misleading.

Showering business prospects with expensive gifts or multifarious financial shenanigans may have worked in the past, but things are starting to change and the government is now claiming a zero-tolerance approach to corruption. The former British boss of GlaxoSmithKline's Chinese arm was convicted of corruption and thrown out of the country after his firm gave billions of yuan in bribes to doctors and hospitals. GlaxoSmithKline was fined almost half a billion U.S. dollars.

Leaner and meaner

Last week, the 18th Communist Party of China (CPC) Central Committee held its fourth plenary session. The meeting laid out major tasks to "comprehensively advance the rule of law." It was the first time a plenary session of the CPC Central Committee had taken rule of law as its central theme.

There will soon be no need for string-pulling as the streamlining of administration and a negative list approach are likely to become law, not just to reduce business costs but to reduce the necessity for under-the-table deals and make these ambiguous practices substantially costly.

No informal mitigation of a sentence will be tolerated. Judicial cases must not be influenced by personal connections, favors or bribery. The judiciary will be completely overhauled, with the Constitution reigning supreme over a revamped legal system.

Rebalancing the equation

"The market is becoming more orderly and regulated, but high transparency and a standard market economy may take years to cultivate," said Zhang Yansheng, secretary-general of the academic committee at the National Development and Reform Commission, the top economic planner and the major power in administrative approval.

Along with swathes of red tape, gone are super preferential tax policies enjoyed by foreign firms in the past. A transparent market demands fair competition.

"Foreign firms should get used to the new norm and set a good example for their Chinese counterparts," Zhang added, but that could be a tough task for all stakeholders.

"We hope the laws and regulations will be applied in a logical and consistent manner regardless of time, place, or parties concerned," said Greg Gilligan, Chairman of AmCham China.

Gilligan wants enhanced protection of intellectual property rights that will encourage entrepreneurs, support the private sector and promote high-tech growth and high-paying jobs for educated workers.

AmCham China members are confident and optimistic that foreign businesses will still have an important role to play in China's reformed, rule of law future, Gilligan said.

Strong rule of law will not help only businesses, be they foreign or domestic, but it will be good for all aspects of the Chinese economy, rebalancing the equation as it enters a new era of development, Gilligan added.

All being well, it should not be too long before Yuval's hopes for a legal system he recognizes as both just and fair are realized, partly at least, as China promises a more open and efficient legal environment for all.