Courting The Dragon
by Ercel Baker

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Be aware of the central government's role
Don't underestimate the importance of government in commercial affairs. Although more than 150 major laws and regulations apply to foreign investment, the legal and regulatory system reveals a general lack of transparency. Investors may well face bureaucratic influence in joint venture operations.

China - unlike the U.S., where federal and state jurisdictions are clearly delineated - has a unitary system of government. A deal struck at the provincial level isn't always safe from changes in policy and regulation at the central level. The machinations of Chinese power structures aren't generally transparent to Westerners.

For example, current restrictions require foreign companies and foreign-invested enterprises to use Chinese middleman companies to get imported products to the consumer. American service companies face restrictions but, where permitted to operate, are required to take on a joint venture partner. While the recently signed bilateral trade agreement (Congress' acceptance yet to be granted) will, over the next five years, lower the bar for American companies doing business in China, such requirements currently remain a legal obligation.

Minimize the risks
Risk mitigation also ranks high among the challenges American companies face. Confirming the bona fides of a potential partner, making certain it's capable and trustworthy - and that it holds the license needed to get imported products into the country - are essential. There are recent examples of firms that failed to gain assurance that approval had been granted by the State Administration of Foreign Exchange (SAFE) on an overseas transfer of U.S. dollars, and are now paying the price.

Such information is typically gathered through an informal network of contacts, guangxi, which all companies quickly learn they'll need to survive. Information garnered through these connections may be accurate but often lacks needed detail and always costs dearly in time. From a financial manager's perspective, the reliability of information field managers glean through their network is always in doubt.

While China has scored great progress in making an increasing number of relevant rules and regulations publicly available, internal policy statements and notices continue to be issued at all levels of government. As AmCham China points out, these unpublished regulations function as law, despite the fact they're often not publicly available.

Exercise due diligence
Much of the information needed to conduct proper due diligence or credit assessment in China is available. Central government officials have become increasingly aware that difficulties experienced by foreign firms in accessing accurate and reliable information has been a deterrent to doing business. They responded by making available information such as ownership details, responsible government authority, size, capitalization, business scope, import and other licenses, shareholders and senior management. Overseas investors and corporations are free to request such information.

Bottom line: There are great rewards to be won in China. But caution is very much in order.

Ercel Baker is chairman of Baker Group International Inc. and its subsidiary, China ProDiligence Inc., in Vancouver, Canada. China ProDiligence has an exclusive representational arrangement for North America with a company, established with the support of Chinese authorities, created to compile pertinent information from the various state sources that hold it. Baker can be reached at (800) 360-9568, or visit www.prodiligence.com.