March 24th, 2008

The law is whatever the Chinese government say it is

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Gen Kanai left a comment for me to read this entry by Paul Denlinger. Paul who spent the last 20 years in China said:
“For many Chinese, “the law” is whatever the Chinese government says it is.”

The law in China is complex. They are subjected to interpretations by officers, at state, at provincials and at local levels. Most Chinese businessman just follow the norm. For example, there are declarations/tax in China on employment for healthcare and accounting. By law, you have to declare “四钱一金” but most business (esp in F&B) outright ignore it.

The law in China is non-existence, vague or worst, conflict with each another. I spent the last week with lawyers and officials in Beijing talking about LP/GP fund structure. The answer I got includes “No way”, “No but …”, “yes but …”, “Yes”, “never done before so no one knows your tax liability”.

The law in China is constantly changing. The story on Regulation 56 is an example, where one day the government decided that all IP/Mobile TV needs to be state-owned or controlled and a week later, the decision was “clarified”. Just a few days ago, they shutdown a few more IPTV sites and reprimanded others.

The law is whatever the Chinese government says it is. We invested in one of the largest and oldest e-Payment company in Beijing 2 years ago. One of the bright spot is the online lottery site they were about to launch with the government lottery (a US$20b/year monopoly business). The site was launch last year and the revenue start rolling in until suddenly the government declared all online lottery to be halt 2 months back. Ouch.

It is no wonder Chinese businessman don’t bother with lawyers. Whereas most lawyers will tell you the most important part of the contract is what happen when things go wrong, Chinese focus on what happen when things go right. If it go wrong, no contract will save the deal anyway.

For the same reasons above, these are also why American business don’t do well competing with the Chinese business in China. Look at ebay, yahoo, google vs their local competitors alibaba, sina and baidu. The latter is still the number 1 search engine China that provide mp3 search that google will not do and thus not likely to overtake baidu anytime soon.

“But baidu is breaking the law!”, you say. Okay, they break law in which country?

Several years ago, when I was doing internationalized domain names, we meet up many officials trying to figure out how we can conduct our business legally. They are always polite but we never got our answer until one of them was kind enough to say “Just go do it and stop asking us. If you ask, we have to say no”.

But thats not good enough for our shareholders. Or any non-Chinese shareholders for that matter. I can understand why David don’t feel like investing in China.

Thats why American companies will keep asking, working with the lawyers to do the “right thing” and get no where. On the other hand, Chinese companies will just go on and do it anyway until they are told not to.

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