Southern Perspective Shenzhen

When I tell people that I studied Chinese Business Law, I usually get the same response just about every time, “They have laws here?”

Ha ha ha, we chuckle each and every time but that is the pervasive perception of many people who do business in China.

And these comments come mostly from people who have been on the ground in China trading punches with suppliers for years.

This reaction is common when coming from the US, where people have sued the golden arches for making them fat or that their hot beverage was too hot.

The simple fact of reality is that China does not enjoy the direct confrontation that we do in the West when problems arise and must be dealt with.

While the courts in China are changing, it will take time for the structure of the legal system to develop, just as it did everywhere else.

In the meantime, you do have several options for dealing with disputes IF you PREPARE correctly.

Mediation is a great choice and is quickly becoming a preferred method of settling disputes in Hong Kong, if fact as of January 10^th, 2010 solicitors are required by law to inform and explain the availability and differences between mediation and litigation.

This is the direction that dispute resolution will take in Asia, and those that do business in Asia will need to understand the manner in which to handle disputes with a minimum of disruption to business.

Mediation is not a one-size-fits all solution to disputes in China, there are situations when it is a good idea and situations when it is a bad idea.

Mediation is a good idea when;

• You have a solid history of cooperation with the other party
• There are many different parties involved or individual parties where there is a clear distinction about who is responsible for your relationship
  • Mediation works best between two parties that will attempt to be fairly open about their relationship
• There are no hugely overwhelming issues between the parties
  • Mediation works well for smoothing over small bumps in the relationship road, not for overly complex and involved issues
• You have an ongoing relationship with the other party
  • Mediation is not a good option for resolving disputes with a wham-bam-thank you ma’am relationship with a supplier that you are using for a single project.
• The parties BOTH want to reach an agreement
  • If one side is going to be a stick in the mud, they will have a pretty easy time stopping the mediation process

There are also times when mediation will probably be ineffective;

• If the parties have a history of adversarial relations or there is hostility between the two parties.
  • If both parties come to the table looking for a fight, they’re going to find one and nothing will be resolved.
• If the issues in dispute are overly complex or involve many different parties
  • Remember the goal of mediation is for the parties to resolve the disputes themselves, the mediator can only facilitate the parties and act as an independent third party
• If the issues are purely legal issues or one party is forced by requirement to mediate.
  • This is the inherent issue I have with judges requiring parties to mediate, when someone is forced into a situation where they must amicably reach an agreement they will often fail to do so if forced.
• If continuing the dispute is beneficial to one of the parties
  • In a situation where one party would benefit from a long a drawn out mediation, it is possible to entice the opposing party by acting as if you are serious about resolving the problem when in fact they are simply wasting time.
• If there is a significant power imbalance between the two parties.

A well trained mediator should be able to help you work through some small problems.

Their job is the help parties look forward and not dwell on the past.

They should also be able to separate the people involved in the dispute from the problem that is the core of the dispute.

Most importantly they need to be able to help the parties find common points of interest and remember why they are doing business in the first place.

Keep your eyes open and your head on a swivel, its good advice in sports and its good advice for China.

Anyone that has looked into buying real estate in China knows that the pricing can fluctuate wildly.

In my Chinese home town of Shenzhen, this is true like no other city.

Prices for real estate in Shenzhen have risen steadily since I arrived here over five years ago.

While prices for flats in Shenzhen are still not so close to the astronomical prices that flats in Hong Kong command, prices here do rival that of those in Beijing and Shanghai.

Shenzhen is an interesting area because of the proximity to Hong Kong and there is reason to believe that there is a significant flow on so called “hot money” from Hong Kong into China via Shenzhen.

China has taken significant steps to try to avoid the inflow of speculative money by placing tight regulations on the RMB and newer restrictions on the flow of investment capital into the country.

China’s central bank recently stated that they would begin to increase the monitoring of suspected speculative money into and out of the country.

The State administration of Foreign Exchange also announced that they would tighten the regulations on individual persons and the transferring of yuan and foreign currencies between bank accounts.

Some experts have expressed doubt that these new measures would have the desired effect on the inflow of hot money.

Because of China’s relatively low priced real estate, speculative capital will follow the old mantra, where there’s a will, there’s a way.

The problem comes into the picture when inflation begins to pressure China’s central bank and it is forced into making a decision about whether to appreciate the yuan or raise interest rates, neither of which is appealing to the Chinese central government.

The central government would be smart to encourage Chinese investors to begin to acquire more investments internationally in order to avoid the continuing growth of a potential asset bubble in some of the major Chinese cities.

While many cities in China still appear to be interesting places for speculative investment, the question of whether or not the assets are still a good value and at what point the asset bubble may burst and how Chinese investors can protect themselves.

Remember the good ol’ days when you could smoke in the hospital? Well, they are gone. Maybe not as progressive as New York, but a considerable one.  Smoking in China is considered a second sport.

South China’s Shenzhen City plans to fully prohibit the premises of all medical institutions in the city in 2011.

All medical institutions above city and district levels, including military hospitals, will ban smoking from June next year, while community health centers, clinics and private hospitals will impose the ban from December 2010, Yang Guoan, vice director of the city’s health education research institute, said at the meeting.

Anyone caught smoking at these institutions will be fined starting Jan. 1, 2011.

Policies for smoking controls inside the Special Economic Zone are still being studied and the levels of fines to be imposed have yet to be determined.

In addition, all doctors will be expected to record patients’ smoking histories when they visit hospitals for the first time, after the ban is imposed.

I am sure it won’t be missed.

Six months ago Shenzhen removed their once mayor, Xu Zongheng, for “serious disciplinary violations”(China Daily)

Corruption is not uncommon in the ranks of officials but day by day work is being done. A new policy has come about recently:

“Officials whose spouse and children have all emigrated to foreign countries should not take top positions in the Party and government,” said a regulation issued by the Communist Party of China (CPC) Shenzhen committee and the Shenzhen government on Wednesday.

The reasoning behind all this is not to discourage people from moving out of China, but to discourage absconding to those places to in order make off with the big government pay checks.

The Ministry of Commerce has estimated, “About 4,000 corrupt officials fled the country with at least $50 billion between 1978 and 2003.”

How effective will this new policy be? It is hard to say now, but steps are being taken even if they are small ones.

I just moved into a new office in Shenzhen and happened across this little gem.  I have driven past this place a couple times. I never realized what this place was  or rather wasn’t.

It is called St. Mars, but quite similar to the more famous coffee shop Starbucks.  The resemblance is rather close. Same colors, script, umbrellas and even the glass awning over the doors.

My opinion on this is clearly ” hitchhiking” on the Starbucks brand.

Instead of me commenting on this further, I thought I would like to let a friend over at IP Dragon get a hold of this. He is very knowledgeable about IP and Trademark. I believe he could offer a better view on this than i could.

Check him out.

Regulating a stock market is not a simple task, as we discussed in the last post, “The Chinese Stock Market, I’m all in and I make all the rules”. 

There is a fundamental difference between the way in which China regulates its securities market and the way many Western markets are regulated. 

This difference is most observable in the basic functions of the Chinese Securities Regulatory Commission (CSRC) and the Securities and Exchange Commission (SEC). 

The SEC is focused on ensuring compliance to regulations, the CSRC “balances” two responsibilities, ensuring compliance and encouraging growth/development. 

Is this arraignment a classic case of the wolf guarding the chicken coop?

The CSRC is the door keeper to the market, they issue licenses to different types of financial service firms. 

Usually, these are short term, for a year, and the CSRC can control market access and, in effect, regulate the market by controlling these licenses. 

The question that comes into play is how does the CSRC monitor itself internally to ensure that these licenses are issued in way to encourages growth of the overall market and that opportunities for self enrichment are controlled? 

Next week we will discuss some of the recent history in regards to State Owned Enterprises (SOE) and the trouble they have had in reform.

For this situation, I don’t think there could of been a legally scripted solution to prevent this.

Like how most of these romance stories began, it was when the Buyer met the Supplier at the fair. A trade show fair that is …..

Something I should point out is, the product here is particularly specialized and the supplier is one of the biggest in China.

Unfortunately I have to keep it vague but it basically goes like this:

-Buyer meets supplier at fair

-Supplier sells a sample to buyer to approve

-Buyer approves sample and wants to start first order

-Supplier refuses to sell sample, as product is being sold to another customer in same country

-Buyer dumbfounded

-Supplier offers a “better and newer” product to buyer, yet still reluctant to sell this, but eventually does

-Buyer knowing holiday is coming up, flies to China to solidify the deal

-Buyer is hoping the new sample will be sent to home office to be approved before they arrive to China for meeting ….. but isn’t

-Buyer and supplier meeting again, supplier now will sell product and the originally approved sample

-Buyer still needs to approve the sample flying over the Pacific sea.

-Happily ever after?

Yes, an over simplified version, but it gets the point across.

Just looking at the story, it makes one cringe at the thought of doing business in China. It looks over complicated, unreliable, down right frustrating. Why did this all happen? Why so complicated? Why so much time and money wasted? Sometimes these questions can not be answered. Moreover, searching for these answers is not important. What is important is, getting what you need and finding out how.

Capitan Obvious’ observations:

Chinese mentality: Cautious, slow approach

Western mentality:  Time-line driven

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Chinese mentality: Indirect

Western mentality: Direct

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Chinese mentality: Willing to wait

Western mentality: Willing to compromise in lieu of waiting

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With all this being said, the beat of business is not done to the same drum. Also, the pace of commerce in the US is based on speed. For a lot of purchasers, they simply do not have the time to jump the hoops of relationship management and supplier development. It just does not exist the same way it does here. Therefore, they are locked into a system and working with China becomes confusing and frustrating.

For Chinese companies, working with foreign companies is frustrating. Relationship management is almost non-existent, business conduct is completely different. It is something that both sides have to deal with.

Again, what is the scripted answer?  I would venture to say there is none. The key to success here is, understanding your surroundings and situation. Preventative home work goes a long way in China and if you are doing business here it won’t solve all the headaches but it will make you more prepared for them.

We all know the Chinese love to save their money, it’s almost the national sport.

No wonder Shenzhen has all the money in the world and won’t pay for a decent football team.

So why are international financial service companies’ not making record profits in China?

The Chinese securities market is very different from western securities markets, learning what these differences are and how they could possibly change can increase your chance for success.

This and following posts will introduce some of the barriers that foreign companies face when trying to gain entrance to the market and how the Chinese market is different from other international markets.

The biggest difference in the Chinese securities market from other markets is the amount of ownership the state has through State Owned Enterprises (SOEs).

When a Chinese SOE opens itself up to investment through an Initial Public Offering (IPO) about two thirds of the shares remain in the hands of the government through SOEs.

This creates a potential conflict of interest because the state has a vested interest in the success of its own companies, as opposed to simply being a referee that ensures fair play.

The Securities and Exchange Commission (SEC) in the has a more clear cut task of monitoring and making sure companies are in compliance with regulations, on the other hand, the Chinese Securities Regulatory Commission (CSRC) must juggle the jobs of developing state assets while at the same time avoid social instability.

This puts many investors in a difficult position, both Chinese individual investors and foreign firms looking to develop a strong Chinese portfolio.

Both of these groups are not able to purchase a majority stake holding in a Chinese company and are not able to have an active voice in the direction the company takes.

This structure encourages investors to be short sighted with their investments, to be speculative and ride the ups and downs of the market instead of finding a company that they believe in and investing for the long term.

The Chinese stock markets will not be able to escape the fluctuations that have plagued the system in recent year until they can decide the position that the state will occupy.

Playing both a regulator and a heavily invested owner in the stock market is not likely to inspire confidence in neither foreign investors nor its own citizens, but maybe thats not the point.

It is not just China getting slammed with duties, Brazil and Armenia are on the list as well.

It was decide last week that a five year duty of 30% will be placed on the countries.

On the same day, they “slapped”  39.2% duty on steel seamless pipe  from China as well.

Beijing has just issued a circular to detail about the National  Day and Mid-Autumn festival  holiday overtime payment scheme.

4 days are considered public holiday while some might get 8-10 days. Only triple overtime wages will be considered for the 4 days that are considered a public holiday.