Jumping into a moving train requires timing. Jump at the right time and the thrust forward is unmistakably satisfying. Jump a second too late or too early and tragedy will likely follow.
Unlike the train that moves at constant speed in a single direction, China's legal and regulatory changes are unpredictable and it is easy to get crushed by the wheels. What's more, negotiating a path through the country's legal system is like trying to jump on the train blindfolded.
"Legal regulations in China change much more rapidly than in the US or England," said Mark Williams, a Beijing-based partner at DLA Piper. "That can have a significant impact on foreign investment."
Williams's colleague, Janet Jie Tang, who was trained in China and the US, is even more emphatic: legal change can derail even the best planned enterprise.
Just look at the rules governing special purpose vehicles (SPV). A year ago, investors could set up a company in a tax haven like Mauritius or the Caymans and use it to buy property in China. But recently, Beijing ruled that SPVs could no longer be used to invest in Chinese real estate, measures that left the owners of existing SPVs in limbo as the new rules don't make provisions for them.
In the blink of an eye, they went from being investors in a growth market to desperate souls unsure if and when they could move their profits out of China.
"There are a lot of uncertainties in doing business here," Tang said.
Beijing normally issues very general laws but leaves it up to lower levels of government to implement them. This opens the doors wide to legal interpretations that vary wildly from region to region.
Shanghai's efforts to set special tax rates for the relatively new Pudong area are a case in point. Looking to develop the area into a financial and business hub, the local government set tax rates for companies at 15%, about half the rate in every other part of the city. This put Shanghai at odds with the central authorities in Beijing that want to equalize tax rates across the country.
"From time to time we see conflicts or contradictions from different government authorities on different interpretations of the laws," said Tang.
Of course, this can work both ways and Tang admits that "there can be a benefit if you are on the right side of an inconsistency." For example, human resource agencies in Guangdong can steal a march on their national rivals by virtue of operating in the only province that allows agencies to offer temporary staffing.
Still, this constant push and pull between central and local authorities can trap foreign investors in regulatory quagmires and belies the idea of China as a single, cohesive unit operating under a master plan.
"You've got to get away from the concept of China Inc, that there is somebody in Beijing that is controlling everything," said lawyer Peter Neumann.
Getting the green light from the central government to operate a business or carry out a specific service certainly helps, but it isn't a guarantee that local leaders won't shut it down. "You've got to look at it on a case-by-case basis," he said.
Fresh challenges
In recent months, Beijing has developed a more hawkish approach to foreign investment, fueled by the conservative lobby.
A number of new laws have been passed in recent months that set out rules for mergers and acquisitions with onerous supplementary requirements. The long-awaited anti-monopoly law will only add to the headaches. Meanwhile, a new labour law that came into effect earlier this year is seen as a means of pressuring investors into increasing wages, limiting overtime and providing better working conditions for employees.
"Foreign investors are investing in China with golden chains," said Tang. "Laws are promulgated more rapidly and that can have a significant impact."
Making things more complicated, Professor Jerome Cohen of New York University was quick to point out that the rules are different for different investors. Chinese returnees face risks that foreign-born business people rarely need consider.
Cohen has been following developments in China's legal environment since 1979. He believes multinational corporations operate at a safer level than smaller business but that is no guarantee of safety.
"Fortunately, most foreign businesses do not seem to realize it, otherwise they wouldn't be so quick to invest," he said.
Fraud or business disputes are particularly difficult to map out. The police and public security bureaus seldom get involved in white collar cases unless it is at the instigation of a prominent local business. When that happens, those under scrutiny can find themselves in untenable situations with little recourse.
"That is an element of risk, but usually with people of Chinese descent," said Cohen. (See: Worst Case Scenario)
China's legal system has come a long way. The country has a very sophisticated set of laws and its legislators have done in a few years what it took the US some five decades to develop. But that doesn't mean the work is anywhere near complete.
Implementation issues
This skeletal nature of China's legal system combined with a general lack of knowledge at the ground level outside the tier-one cities can pose unexpected risks. Subtle differences in implementation mean that simply reading laws promulgated by Beijing does not guarantee safe passage.
"The most important thing is implementation," said Dane Chamorro of Control Risk Group. "Guys in one province will implement things the way they see fit and it's not necessarily the way they would do it in Beijing or Shanghai."
More than that, the lack of corporate transparency can make it difficult to accurately gauge the quality of a business partner or an acquisition target.
These problems are historical. China has not had an enforceable legal system in 4,000 years while its citizens tend to rely on family or guanxi to resolve disputes. The need to preserve face is the only business guarantee traditionally available.
One side effect of this separation between family and business is poor enforcement for things like employee theft.
"Police are likely to say: 'You hired this guy. You appointed him. What does this have to do with us? This is a private issue'," said Chamorro.
More than that, a shortage of officers, the difficulties of solving white collar crimes and a results-geared promotion mechanism means investigations rarely get off the ground.
Both Beijing or Shanghai have less than 40,000 police officers, a number similar to Hong Kong. But the population of each city is at least twice that of the Special Administrative Region. Officers generally have one year to solve a crime so they are unlikely to open a file for a case that is not virtually open and shut.
"Just getting the police to issue a case number is very difficult," Chamorro said. "And even if you win, you only have a 50% chance of getting your ruling enforced."
Ultimately, said Chamorro, it is best for businesspeople to look after their own interests, do their homework and take each step on solid footing, even if it means moving a little slower. "Because the law won't protect you, you have to make sure you protect yourself."
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