July 20th, 2009
03:42 AM GMT
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To get by in China, it’s all about relationships. In business there may be rules and regulations, but long-time China hands will tell you it can be a complicated and often frustrating experience. So to get anything done, you need to find the right person – either in government or the private sector – and you need that person to like you.

So, a little wining and dining, spending some time getting to know each other, doesn’t seem unreasonable.  How about entertaining a senior member of the Chinese team which negotiates the price of iron at a luxury box during the Olympics, as BHP did last year? It’s not illegal, but a grey area of the law, says Xianfang Ren, a senior analyst with Global Insight.

“The line between entertainment, public relations, and government relations and bribery, commercial bribery it’s kind of blurred here in China,” he said. “Especially in a country that good government relationships are important in getting deals and contracts.”

But China is accusing the mining giant Rio Tinto, and its Chinese born Australian national executive Stern Hu, of paying bribes for crucial information. At the time, Rio Tinto was involved in tense and often acrimonious negotiations over the annual price of iron ore. They are accused of stealing state secrets.

“What’s happened here, the stakes have gotten so high that they’ve trotted out their heavy artillery: ‘You’ve taken state secrets’. It’s a very vague charge and it can mean anything the party wants,” says Derek Scissors, a research fellow for Asia Economic Policy at The Heritage Foundation's Asian Studies Center.

Many within China’s iron and steel industry will say privately it is fraught with corruption. Hu is the only foreigner being detained, the rest – a small but unconfirmed number – are Chinese. The investigation may be an indication that Beijing is moving to clean up the industry, analysts say.

But with one foreign national behind bars, the Australian Prime Minister warned the world is watching. On the same day, U.S. Secretary of Commerce Gary Locke told CNN: “We need assurances and confidences that people working for multinational companies, international companies, American companies will be treated fairly.”

Derek Scissors from Heritage warns the situation can suddenly change, especially during some high-level iron ore negotiations where billions of dollars are at stake.

“The international message they’re sending is, if things get ugly enough and important enough we’re going to break the rules. We’ll follow our rules not international rules; we’re not going to respect the rights of multinational executives’,” Scissors says.

Where does this all leave the expatriate businessman or woman living in China? Many Western companies spend big on commercial research for strategic planning and marketing in China. And every business person on the ground here knows the cultural importance of guanxi – or “developing good long-term relationships” – with government officials and local Chinese business partners. Has the line of acceptable behavior in China been redrawn?

Perhaps the best advice for foreign workers in China comes from Xianfang Ren from Global Insight, “I think it is always safe for them to stick to the higher standards, the stricter standards because some multinational companies, I understand they have much stricter standards overseas.”

In other words, don’t do in China what you wouldn’t do back home – even if it seems everyone else is doing it.

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Filed under: AsiaBusinessChina


soundoff (26 Responses)
  1. guycom

    even if that means failing? That's a stupid statement. If the choice is getting the deal, the bonus and the promotion and not, doing what the other guy is doing is just smart.

    July 20, 2009 at 5:18 am |
  2. Jacob

    China is now not only trying to stamp its authority on the economic world, it is now doing the same from a cultural point of view. In China, the Chinese way is the norm, but internationally the Chinese want to make their way the norm too – either their way or the highway.

    They can change the rules as and when it suits them, and the words 'integrity' and 'consistency' don't apply, unless you interpret it as they are 'consistently without integrity'.

    I wouldn't do business in China for all the tea there.

    July 20, 2009 at 5:20 am |
  3. oohkuchi

    "In China, the Chinese way is the norm, but internationally the Chinese want to make their way the norm too – either their way or the highway.

    They can change the rules as and when it suits them, "

    –how very different from the United States, eh?

    July 20, 2009 at 8:03 am |
  4. Ronald

    I'm pretty sure there is a middle ground between guycom and Jacob. It is pretty safe to do business there, as long as you are aware that it's different from doing business in the West.

    I disagree with guycom that you should "do what the other guy does", because the "other guy" regularly gets imprisoned or killed for it. If you're a foreigner you are especially vulnerable to being blackmailed, and if your competitors find out they *will* make the information public. Heck, they may even make it public if you didn't even do it, just because they would hinder your business. If you are then guilty, you're in more trouble than if you're not.

    Apart from that, remember that the dominant mode in China is state-capitalism. If you hurt a large business, you are in fact directly attacking the Chinese state. Remember that before you actually pull off something that threatens what they perceive as vital interests. It is probably smarter (if you want to keep doing business in China) to create a win-win situation for both parties. This is ofcourse sound business sense in *any* sort of business, but it is especially vital in China where if you "win" the state just finds a bigger stick to beat you with. This is where Rio Tinto made a big mistake. They thought they could "win" and get away with it, and have the Chinese say "Oops! Well, next time we'll try harder!". That's just not how they do business and it was pretty native of Rio Tinto to think it would go like that.

    July 20, 2009 at 10:11 am |
  5. caed

    For someone like myself who lived in China for around 10 years and watched this kind of thing happen to many an expatriate around me, I am not surprised at all. This case is only very rare in the fact that it is being published in the international media. There are hundreds of cases like this every year in Beijing and Shanghai alone, where expatriates in China are robbed of their rites and their businesses and livelihoods being taken away from them... once you are not of some immediate value, the general mentality in China is that someone will try to take what you have. You were allowed there because those around you see some gain, once you completed that, then you are expendable and someone local will do their best to take it away and keep it for themselves. Who is going to help you in China? Your country cannot? Why would another Chinese help you – that would be against the welfare of their country! Is another expatriate there going to help you – and jeapordize themselves? I think not. In a country where every house has a cleaner who is snitching to the apartment complex about what time you sleep and what time you left your home... in a country where you home is being regularly entered without your knowledge... in a country where your phone is monitored, every email copied and scrutinized, what makes you think that you stand a chance?

    July 20, 2009 at 10:23 am |
  6. Blessed Geek

    It's the same in the United States.

    You have to hire the right lobby. Get to know the right state congressman, have some relationship with the town counsel or business development council members. A good relationship with the town accountant is especially helpful.

    In fact, the guangxi process in the United States is more complex and expensive than the ones in China. The "legitimate" political-business relationships in the US are officially illegal in many parts of the world, perhaps, even in China.

    A lot of cultural shifts have happened over the years. For example, in Maine (certainly in many other states), many households follow the Japanese and southeast Asian practice of not wearing street shoes at home. Where toddlers could crawl the floors to their hearts' content.

    It's the pot calling the kettle names.

    July 20, 2009 at 10:26 am |
  7. Stephen

    Doing the right thing, even if it means not getting the deal done. Because bribery is wrond, period. And businesspeople that pretend its acceptable just because others do it are no less culpable than the people receiving the bribes. Of course, this does not mean that the current crackdown in China should be supported – we dont know enough about why the Chinese authorities are doing this to make an informed call. I suspect its more to do with cultural imperialism than ethics.

    July 20, 2009 at 10:29 am |
  8. George Camacho from Tumon, Guam, USA

    Like it or not, you better start learning Mandarin. In terms of population, CHINA IS SUPER SUPER HUGE! 1 out of every 5 people in the world lives in China. The US and Japan an't even close to that. 1/5ths of the world's total population lives in China. Better start learning Mandarin!

    July 20, 2009 at 11:28 am |
  9. jaderdavila

    china now is in the time of 'wild west'
    commerce has its rules anywhere
    pretty soon the chinese will see the benefits of long lasting commitments
    china will comply as everybody does

    July 20, 2009 at 12:07 pm |
  10. mjs

    Its strange I find business elsewhere in the world no different

    July 20, 2009 at 12:10 pm |
  11. ABono

    A worrying development. China is just starting to flex its economic muscle, and in Rio's case the results are not pretty. Sure they aren't happy with the Rio deal falling through, but thats business. China has acted like a bride spurned at the altar, and are in the process of exacting their revenge. Can you imagine the bully that China will become once their economic power eclipses the US.

    July 20, 2009 at 2:05 pm |
  12. Steven

    Ditto to Jacob's comment...and having done business in the past with the Chinese where the philosophy of truth is very blurred ...if you are not chinese it's not really lying! for a chinese to say whatever they want...I simply don't trust them, from bitter conmmercial experience. And don't start me on the lack of quality in their product...

    July 20, 2009 at 6:26 pm |
  13. Elke, Germany

    I´m not a business expert, but I had the feeling, that China was shocked in some way that it didn´t got the deal done with Rio Tinto. What´s now happening to Rio Tinto is, to show the business world that China is a big and strong business power. And nobody can handle China in this way without consequences.

    July 20, 2009 at 7:02 pm |
  14. laowao

    I thik this page interests Chinese people a little.
    I have translated it into Chinese and the URL is below
    http://www.laowai-talk.com/2009/07/20/cnn%E4%B8%AD%E5%9B%BD%EF%BC%8C%E5%85%B3%E7%B3%BB%E5%92%8C%E5%8A%9B%E6%8B%93/

    July 20, 2009 at 10:08 pm |
  15. Cedric Byrne

    Rio's board of directors was quite aware that if they had flagged a steeply discounted rights issue from the start, there would have been an almighty shareholder revolt. The only way that they could get a rights issue over the line was to propose a deal that was so outrageous that a rights issue would be demanded as a palatable alternative.
    China has spit the dummy and they will pay for that. The breakdown in contact negotiations means that they pay spot prices for iron ore. That's what Rio and BHP have been after for years.

    July 21, 2009 at 9:22 am |
  16. Verito

    having considerable business in china I have nothing but admiration for what they have achieved. one doesn't have to look too far back to analyze 'corruption' – it happened in the states, in europe, in japan, korea and it continues to happen even today in smaller degrees. it does not have to be money – each time one gives a gift or a favor or a karaoke night out like it happens in china it's corrupting behaviour because it means you induce your counterparty to feel obliged to return the favor with something else in return. All the rest ie. this is our culture, guanxi etc is hogwash and should be treated like that . Unfortunately again looking at history corruption can only be erradicated if we ALL make an effort. I fear what we see now in china is just theatre – when the show is over and spotlight the cast will change but the show will continue. If any country and please don't say it only happens in china – wants to make an effort to eradicate corruption it has to start from the top – it has to be systemic and it has to be long lasting – to be corrupted has to be a big social stigma and so should to corrupt.

    July 21, 2009 at 5:03 pm |
  17. Bam Sohatono

    The westerners ' reaction is always very predictable. If a westerner is arrested for any crime in an Asian or African country, they always come out yelling and protesting that the westerner is innocent, even before any court proceedings. Each time a westerner gets caught smuggling drugs, his embassy will protest innocence. Sounds familiar? And now when a Rio Tinto's employee is charged with breaking the law, Australia is quick to judge his innocence, even before any court proceeding has taken place. Even before the prosecutor has a chance to prove his case in court. If China is a weak country, Australia would have sent in their marines to free him, just like in the 18th and 19th century. Yeah, westerners always conduct business cleanly. No spying and stealing. They don't break laws. Oh yeah.

    July 21, 2009 at 6:29 pm |
  18. Luc

    I was a mortgage consultant in America, and boy, tell me there is not corruption in this business here. For me to get around this city, I have to have many relationship with the local and city and state government, and even my company is paying for me to do so. So tell me who doesn't want relationship when you are a business men or women. There were time I was told to do stuff I wasn't comfortable.

    It is also true that we westerner quick to point out others mistakes without acknowledging we too have the same problem. It is also true that we always assumed that we are always innoccent no matter what we done wrong in other countries. Remember the guy in singapore during the clinton's administration...forgot his name, Michael Faith? He lutted the street of Singapre and was later caught by the Singaporean policce and immediately the Clinton administration made an appeal to the Singaporean's government?

    If you break the rule, face your consequences.

    July 22, 2009 at 12:39 am |
  19. Richard

    Payback for a cancelled merger???

    July 22, 2009 at 9:48 pm |
  20. Jas.

    I have done business in China. The legal system is a disaster. Most of the courts and attorneys are corrupt. If you are a foreigner your chances
    of winning a court case against a Chinese national are minimal.

    July 24, 2009 at 1:11 am |
  21. NoMercy

    This isn't just a nasty, inflammatory comment. Read on please. I grew up in Lorain, Ohio (go ahead, Google Lorain's demise) formerly home to a major steel maker, auto maker, telecommunications equipment maker and once, HUNDREDS of other manufacturing businesses. My high school years were survived there during the highest unemployment I can remember – 24% and home foreclosures advertised by large white signs were on every single street in town. What's happened in the meantime with Lorain and the US as a whole? Status quo. Here, big labor was in bed with government and, well, see what has happened in 25 years. I've said for many years "America's wealth and future have gone to hell in a hand basket, woven by the AMERIKAN unions, made in China." Good for China. Good for the "KOLLEKTIV" system of Taoist/Maoist/Buddhist thought systems. America was so afraid of the the "Reds" 60 years ago and the ridiculous cold war that ensued – and AMERIKA KOLLEKTIVLY became exactly what it thought it feared most, thanks to labor unions run amok. China has the will, the population, the foresight and certainly the values that the US has long lost. What a tragedy so many of the "Greatest Generation" died, fighting the evils of the various Axis Of Evil Powers-That-Were. What if the Nazis had won? Really. Where would we be now? There probably wouldn't be a China, no illegal immigration, no fake BUMS waving signs, and most certainly no radical religiously oriented terrorism. Chew on that thought for a while. My children are going to master Putonghua and Bahasa languages to ensure they have a future as (relatively) free and prosperous world citizens in a future world where China is the Lord and Master of ALL of us who just HAD to have those doggoned 89 cent widgets from Wal-Mart. Grow up, take it on the chin and resolve yourselves that China will be the standard regardless of its endemic corruption and refusal to play by international "rules" of business. Thanks for reading...hope this both inflames the mentally lame/lazy and inspires the wise. Love, NoMercy, gotta get back to my Rosetta Stone program!

    July 25, 2009 at 2:01 am |
  22. Donni

    soo true Bam, in fact I tell you right now, you westies are no better than us, the only different is the standard, while its possible to bribe our officials for say 100 bucks, the same amount won't work for yours, but 10,000 probably will.

    human greed knows no boundaries, or countries, or colours

    July 25, 2009 at 2:59 am |
  23. RENGAM

    CNN BUSINESS (360), July 20, 2009 statement " China, 'guanxi' and
    the Rio Tinto arrests," is COMPLETELY FALSE & MALICIOUS AS THE
    WHOLE WORLD KNOWS THAT THE UNITED STATES GOVERNMENT DEBT WITH CHINA IS 3.8 TRILLION US$. IT WILL TAKE 28 YEARS FOR THE U.S.A. AND OTHER WESTERN POWERS
    TO CLEAR THEIR DEBTS. THE WARS ALL OVER THIS WORLD IS
    PERPETUATED BY THE SO CALLED "SUPER POWERS TO PLUNDER AND STEAL FROM THE DEVELOPING COUNTRIES & THE POOR DESTITUDE COUNTRIES UNDER THE GUISE OF FREEDOM & DEMOCRACY and BASIC HUMAN RIGHTS." The mere fact that there is FAMINE, PAIN & SUFFERING AMONG THE YOUNG AND OLD CITIZENS BECAUSE OF WAR & TRADE SANCTIONS IS A TOTAL DISGRACE TO ALL THE SUPER POWERS OF EARTH. God is Love & Love is Live and Live is God to ALL HUMANS.

    July 25, 2009 at 7:03 pm |
  24. RENGAM

    THIS IS THE CASE OF " THE POT CALLING THE KETTLE BLACK ! "
    THE FIRST WORLD WAR, THE SECOND WORLD WAR AND ALL
    OTHER MINOR BATTLES MADE ONLY THE "RICH RICHER AND POOR DESTITUDES CITIZENS OF THIS WORLD POORER."
    SAVE THIS WORLD BEFORE YOU DESTROY IT OR THE SUPERIOR
    PLANETS OF MILKY WAY STEP IN TO MAKE MATTERS WORST FOR
    ALL LIVING THINGS ON EARTH DUE TO ' LAWS OF NATURAL JUSTICE AS EVIDENCED BY HISTORY OF THIS WORLD ! ' "

    July 25, 2009 at 7:19 pm |
  25. mike

    Having lived and worked and purchased property in China (I am Australian) I can well attest to the on-going need for "giving face" in all negotiations. If you smooth the way with gifts you will be treated with respect and helped. Western culture doesnt seem to understand the Chinese need to talk about every aspect of a deal at lenght. Where a simple yes or no would suffice in most western discussions a more detailed explanation regarding no to an offer is the norm. I have left many meetings with a throbbing head-ache caused by the endless discussions of the finer points of buying furniture for a house( as an example) where in Australia you would just say" I need this and that" and it happens. Guanxi is a delicate instrument in negotiations as each individual wants to be more important than the other and Chinese dont like it when you favour someone more than the other. If you are invited to a banquet lunch in your honour it is hard not to offend someone unless you get all and sundry drunk with a thousand toasts and "gonbei" Rio Tinto's actions have caused Chinese authorities to lose a massive amount of face, essentially Rio had them over a barrel and were charging like wounded bulls. That hurt the collective pride of the Chinese and now its time to regain some face. Australia isnt the only iron ore producing country in the world, but as a destination for children to be sent for education and lifestyle it is desirable. Its all about face.

    July 26, 2009 at 10:54 pm |
  26. icon pack

    What touching a phrase :)

    October 8, 2012 at 6:12 am |

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