Regulations in China: Are You Prepared? Are Ready? Are You OK?

Wednesday, April 30, 2008 0:24
Posted in category Uncategorized

More than anything else, when speaking to investors who know China well, it is China’s ability to seemingly care little about them when releasing regulations that tends to frustrate, irritate, and be of concern to them.

It is something that we saw on perhaps the largest scale last week when thousands of residents and visitors learned to the new visa regulations the hard way. Without warning. It is something that I have seen in action while working in the banking, real estate, and logistics industries.

One of my favorite conversations was with a real estate investor on June 2, 2006 while we were closing in on our deal. he was really shocked by the new taxation rules (5 year over/ under and 70% of new homes must be 97m or less), and essentially said “don’t they realize that they just made our model impossible?”. and the answer was easy for me.. “yeah, they know that, and when they stack our model up to the “China” model.. .they made the right decision”. Even though I personally lost out on the deal, I still stand by that.

After all, the regulations themselves were mature/ strong on their own, and we all knew that changes would be made to take the end off the first round (the 70% rule was eventually looked over by nearly everyone).

Usually, one of the first responses to a change in regulation, is to cry “its not fair”, and this is particularly true when someone has a bit of skin in the game. The regulations rarely offer any grandfathering, can sometimes come without warning, and that can hurt. there is a LOT of room for improvement on how the regulations themselves are released, and last week was just one case of many where someone made the decision without consideration of those who would be most directly impacted.. and how that impact would be felt.

In the case of the recent changes in visa regulations, there were two primary drivers that I think were in play:

(1) China has been looking to clamp down on those who work in China on long term tourist/ business visas. These are people who have technically (even if they were the nicest people in the world) on the wrong side of the law, and knew it from the first day they called a visa consultant to get them their visa.

(2) The recent negative press I think motivated someone to push this forward as many freelance and contract reporters are on the affected visas.

Continuing with this example, and assuming those were the reasons, more warning should have been provided. After all, it appears that hundreds/ thousands of legitimate travelers have been affected by this, and economically, this had an impact so big that there was a bit of flexibility to the new rules offered late last week.

Where firms/ investors need to pay attention though is here. China is not ungrateful for investment, technology, management training, loans, etc… Like some in the foreign press would like their readers to believe.

It is that they are unwilling to continue a pattern of behavior and development that they do not feel is in their best interests long term.

There is and has been a sense of entitlement in the foreign community about their contribution to China, and its economy. that because of foreigners and foreign investment, everything that has happened in China.. that without foreigners this place would flush down the drain… etc. and even if true, that does not mean that they should just bend over to the interests of foreign parties.

They have 1.4 billion people to manage, and at all times that number will trump anything else offered.

For those who have been following the What if series of events I have been putting together, then you know that we have been trying to work through some of these issues. I am bringing people together who are old China hands, industry experts, and policy poeple to think about next steps. Why do we do this? Why do people keep coming back? Because it is all relevant, and the process itself has opened up a lot of discussions surrounding macro events that we feel will eventually impact more than a few of us… and by going through these exercises, we are able to walk through some mock scenarios of what could happen.

Why do I mention this? Because as far as I am concerned, everyone in China should be having internal What Ifs on a regular basis. What happens if you have labor shortages in your area? what if Taihu is covered in algae? what happens if the Olympic pool drains Hebei???? What if X regulation changes tomorrow??

Because in the end, it is only through these processes that firms can really be prepared for China’s business conditions. Conditions that are in a state of 24/7 hyperactivity, and if there is one consistency in China it is that there is nothing isconstant and anything can change.

It is s living model, not a stagnate one, and you can bet more changes are going to be made. The only question is whether or not executives will be ready for the changes ahead of time, or be steamrolled by them once they come.

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5 Responses to “Regulations in China: Are You Prepared? Are Ready? Are You OK?”

  1. Daniele says:

    April 30th, 2008 at 1:43 am

    Lets say you have been living in a dream. You have lived in China for almost 9 years, legally working and paying your taxes (far more than the average local). Got married to a local and had a kid now in kindergarten. Considering these recent events and the way things are going, is it a good time to start planning to leave or do we still have several years left?

  2. Rich says:

    April 30th, 2008 at 2:21 am

    Daniele,

    Not knowing your complete situation, I cannot comment fully. But I have no plans to leave. China has a lot of opportunities, a long journey ahead of it, and while sometimes things pop up… many of the things that pop up should be expected to.

    There are some increased costs coming, and the old way will change, but it you believe in China then there is no reason to move.

    R

  3. China Law Blog says:

    April 30th, 2008 at 3:29 pm

    Great post. You have totally nailed it.

    China will just off and enact some new regulation or law and there is no concept of there not being ex post facto laws. We had a client who spent millions on a particular type of business, which business was pretty much taken right out from under him by new regulations with absolutely no warning or compensation. This sort of thing happens all the time. A story I always tell when I am speaking on China law is how one time I was reviewing a regulation with one of the Chinese lawyers with whom I work and he told me that I was looking at an old version of the regulation. I proudly told him that he was looking at an old version of the regulation; mine was the new one because it was only four weeks old. He then told me that his was only one week old!

    Any foreigner (with the possible exception of the Intels and Caterpillars and Coca Colas of the world) who believes China will bend its laws for them (rather than for its own good) is just wrong.

  4. latinoamericanosenChina says:

    April 30th, 2008 at 8:25 pm

    Congrats for the post!!

    As you mention on your post, these changes were imminent and although I am part of those “on the wrong side of the law” (aka illegal alien) I knew that someday it had to change. I can’t recall another country where you can get a 1 year visa by just paying a couple hundred dollars… I believe this is also the tip of the iceberg in terms of regulations and I believe that it will work out in the long run for those of us who “believe” in China. For now, for those who really want to stay we will figure out how and for those who don’t this is the best excuse to go back home.

  5. Nikki says:

    July 23rd, 2008 at 12:23 pm

    I bet all this B.S. is coming from Americans who always have to twist something because America is so F ing twisted. Now we won’t expose how this always happens in America but we want to mess with an up and coming country who keeps to themselves. Well I am American born and raised always lived in the ghetto, but always self educated, you don’t want to know half the ish that goes on, and I can begin telling you, but my head hurts and my fingers will too after typing so damn long. Give it up on pointing fingers because just because this same situation is not exposed, you can believe it’s happened or is happening right now as you read this. Still do business in China but make sure you are a slick can of oil see you can slick da slicksta remember that wherever you go, stay on your toes and you’ll neva get knocked down.