Guanxi Takes 30% of Doing Business in China

Cheung Kin-yu is a Hong Kong entrepreneur who has taught “Doing Business in China” course to MBA students at a number of schools, including the Chinese University of Hong Kong, the University of South Australia and Tsinghua University.

By Sunny Lee
Korea Times Correspondent

BEIJING ― With China's ever increasing global prominence in business, those with interest in China have been treated to a binge of books about ``how to do business in China.'' Subsequently, a glut of wisdom has been shared. However, recently, a debate has emerged regarding how much ``guanxi'' or ``personal relationship'' plays a role in doing business in China.

Some brush guanxi aside, saying it doesn't work in modern China. Others overestimate its role as a magic pill that opens the door for business opportunities. Cheung Kin-yu, a Hong Kong entrepreneur who has taught a ``Doing Business in China'' course to MBA students at a number of schools, including the Chinese University of Hong Kong, the University of South Australia and Tsinghua University, argues that guanxi still makes up 30 percent of Chinese deal-making culture.

The 60-year-old Cheung spoke to the Korea Times in order to offer some tips on ``doing business in China,'' specifically tailored for Koreans.

Korea Times: What's the biggest weakness of Koreans doing business in China?

Cheung: For Koreans, firstly, you need to learn to speak Chinese. The locals respect you if you speak their language. That's very important. When you do business in China, you need to earn respect from the Chinese people. The respect comes from knowing their language.

People habitually say that misunderstandings between Chinese employees and foreign employers happen because of cultural difference. I beg to differ. I think actually it's less of a cultural issue, and more of a language issue really. It's the language that creates the misunderstanding in the first place. The divide then highlights the cultural difference. People then point out cultural difference as the culprit. But, the real problem is the language, in my personal opinion. Learn the local language and understanding the cultural comes naturally.

Secondly, you need to have a personal interest in China. I think it's psychologically important that you like a place you go to frequently. A Korean businessman doing business in China is likely to shuttle between the two countries for many years or even decades. So, I even tell my students who come to China 'you should love China.'

KT: What line of business Koreans should invest in China?

Cheung: High-tech and services industries. Please, no more manufacturing. You're not going to have much chance of succeeding in manufacturing now. You should bring to China what China lacks.

KT: How important is guanxi? Everyone seems to have a different idea.

Cheung: I am a practitioner. From my experience, guanxi makes up about 30 percent of the business deals in China. Why? In China, there are a lot of rules and regulations. And it is the local officials who interpret the law. So, knowing the officials is very important. They are the source of information.

You also have to build guanxi with your local staff. And that guanxi is to build trust. The third part of guanxi is your company's relationship to society. That is your company taking corporate social responsibility.

It's good that you make money in China. But you should also contribute to society. That will make people respect your company. To be successful in China, you must really understand this.

KT: Does 'social contribution' really influence consumers' choice of products?

Cheung: It has become particularly important after the Sichuan earthquake. The Chinese central government openly said ``everybody is responsible for everybody else.'' This reinforced people's thinking about their choice of products. Now, people pay attention to the companies' social contribution.

KT: Some Korean entrepreneurs in China say Chinese law is confusing.

Cheung: My advice is to learn to comply with Chinese law very early on. Some rules are enforced strictly while some are enforced loosely. The laws are there. But how to apply the law is another matter. I think this is the art exercised by bureaucrats. As I said, the authority of interpreting the law falls into the hands of the local officials. It's a technique. The central government gives the local governments the authority to alter the law in accordance with local needs. This confuses foreigners.

KT: What are the things that often trouble Korean companies in China?

Cheung: Taxation. The taxation law requires you need to keep a receipt for all transactions. But, in actuality, it is not enforced very strictly. In Beijing, a taxi driver gives you a receipt automatically. But in most other parts of China, you need to ask for one.

Since the law is not strictly enforced, a lot of foreign investors neglect this issue at the initial stage of their investment. They don't keep track of their transactions and expenses diligently. That's fine during the first 12 months. It doesn't cause any problem. But it will be a stumbling block afterwards. At some point, you will discover that your logbook doesn't match your actual financial transactions. You cannot go back because you've already stepped inside too deep. That means, you're on the wrong side.

You need to know the Chinese taxation system and follow it from the beginning, particularly the invoice system. You also need to make sure you understand the four insurance systems that apply to Chinese employees: retirement, unemployment, medical and housing. It sounds difficult, but it's all freely available on the government Web site. In certain townships in southern cities such as Dongguan and Shenzhen, there are government Web sites translated in Korean because there are many Korean companies there. That's a good starting point. You should get the information from the government source.

Lastly, get the correct information in China. There are three levels of information in China. The central government, the provincial government, and the local government.

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