1. DOING BUSINESS IN CHINA: POLITICAL ENVIRONMENT
David B. B. Helfrey
March 23, 2013
I appreciate the opportunity to share with you one of my few remaining
passions – China and just about everything about it.
Today I would like to engage you in a conversation about China and its
leadership post-Mao Tse Dong – feel free to engage in the conversation with
questions and comments as the mood leads you.
An event occurred in 2011 which I believe has the potential for dramatic
consequences on China’s leadership and society. We will get to that event shortly.
But first – a little background on me.
I am a litigation attorney – I was a defense attorney, prosecutor and judge in
the U.S. Army. Thereafter, I joined the U.S. Dept. of Justice’s Organized Crime
and Racketeering section more commonly known as the Strike Forces against
organized crime, i.e. developed Mafia prosecutions through the Midwest. I was
based in Kansas City.
If you saw the movie Casino, that was my last prosecution – a 4-month trial
that linked the Kansas City, Chicago and Milwaukee Mafia families – the
Teamsters Union leaders – and their Las Vegas representatives to a skimming
scheme from many prominent casinos of about $2 million per month.
Since then I have been in private practice litigating intellectual property
cases, white collar criminal defense cases, celebrity divorces – almost anything
else that gets me into court.
Clearly – I am well qualified to make this presentation today – not
convinced – you are a skeptical group.
Perhaps this will help.
In 1996 I married a former diving champion from Shanghai who had
excellent relations with many prominent leaders while with the diving team, in the
1980’s and 1990’s. One, of whom, went on to become the President of China.
Therefore, through those connections I get exposed to a rather broad cross section
of Chinese society including Government and political leaders, cultural leaders in
Doing Business in China (3-23-13)

2. opera and other entertainers, and businessmen, primarily Chinese, U.S., Taiwan
and Hong Kong business people operating in China.
I have worked with the People’s Bank of China in assisting in the putting
together of the Chinese Anti-Money Laundering regime. We spend a great deal of
time in China and will spend even more in the future, since I would like to retire
there.
I have represented Chinese companies in the U.S. court system and Ruby,
my wife, has represented many of my client’s in establishing businesses in China.
With those impressive qualifications, let’s look back to the Mao Tse Dong
area at that time – China’s leaders were highly political – strong personalities, very
charismatic. The three most prominent were Mao; Deng Xiao Ping; and Zhou En
Lai.
There were many others – including our mystery person’s father who we
will discuss momentarily.
Mao’s great leap forward and the Cultural Revolution – while having the
trappings of social and economic underpinnings – were largely designed to
maintain Mao as the undisputed political leader of China. Obviously, Mao had a
keen political sense and ruthlessly kept his rivals or potential rivals at bay. He,
through his personality, was able to mobilize the Chinese citizens in huge National
political movements. We do not see many with that ability in leadership positions
today. The man I will speak about, in a bit, may have had that potential.
Those mass movements largely served their purposes and Mao was the
supreme leader of China until his death in 1976.
Deng – a revolutionary and a charismatic leader in his own right – was
imprisoned periodically during the cultural revolution, which existed for about ten
years from 1966-1976. Not only was Deng, but also his family, were subjected to
humiliation and persecution. Mao died in 1976. Deng, after the death of Mao,
became China’s paramount leader – he advocated a more capitalist economic
system under the control of the Government. His famous statement captured his
concept. “It doesn’t matter if the cat is white or black, as long as it catches mice.”
He was also keenly aware of the adverse consequence of political egos – the
back-biting, the intrigues those egos caused and the wasted energy and
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3. consequence of political struggles between powerful men which resulted in the
deaths of 100,000’s of people and ruination of many otherwise worthy and
dedicated citizens of Revolutionary China.
What you begin to see with the ascension of Deng are leaders who are not
political leaders, but individuals with engineering, economic and technical
backgrounds – the technocrats with much less political skills than the early
revolutionaries of the Chinese revolution.
Deng carefully picked the leaders of China. They were problem-solvers not
driven by ego or visions, but by identifying a problem and solving it. Many were
colorless – with routine or even dull personalities. Few were bigger than life.
Like Mao, Deng, Zhou En Li, etc. and someone we will discuss shortly.
Deng, who died in 1997, is credited with anointing Zhang Ze Min to become
the President of China, Zhang is an electrical engineer by training, and also Hu Jin
Tao, who was president until this year, who was a graduate of Tsinghua University
with an engineering degree in hub-hydro power stations – I can’t imagine a duller
field. Hu Jin Tao became president long after the death of Deng. It is a testament
to the power and respect the Communist Party had for Deng that he controlled
significant aspects of China, even for many years after his death.
Deng was the second undisputed leader of China, post-revolution. He didn’t
hold the position of president of China. Neither did Mao. Neither Zhang Ze Min
or Hu Jin Tao achieved that status. I do not believe the current president will
achieve that status either.
The current leader, Xi, Jin Ping, who succeeded Hu Jin Tao this month, was
also educated at Tsinghua University where he studied chemical engineering.
Deng advocated consensus decision making and discouraged long-winded
speeches that didn’t address a “problem” or offered clear, technically sound
solutions. He is quoted as saying just churning the air with long speeches was a
waste of time. Therefore, it is not surprising that the larger political issues of the
day went unaddressed by Deng Xiao Ping.
Rule of law – which he favored.
Corruption.
One-child policy.
Land ownership.
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4. Migrant workers.
Freedom of the Press.
And many other such issues.
But other issues are addressed and addressed very well –
Economic expansion.
Creation of jobs.
Creating great schools.
Creating niche market. Most recently, solar energy manufacturing.
Creating new and modern transportation systems. New airports, inter-
province highways, high-speed trains, some of world’s best harbors.
Building great hydro-electric dams.
Etc.
These technocrats guided China to the #2 economic power position in the
world in a very short period of time (20-30 years) and have successfully laid the
economic base that will, one day, overtake the U.S. economy. The only question is
when is the conclusion of most economists. I also suspected between 2025 and
2030. OECD (Organization for Economic Cooperation and Development) is
predicting this will occur in 2016.
The Communist Party has become a group of technocrats not necessarily
endowed with great political skills to incite the people to support them, to
motivating the population or to gain the intellectual and emotional support of the
people. That is, the current leadership does not inspire the people they would be
willing to die for.
The Communist Party’s founding principle of workers’ rights,
egalitarianism, etc. has become less of a focus – and economic development has
taken center stage.
So, the intellectual basis for the Communists’ remaining power – shifts from
the great principles of Marx to creating a new, pro-market society, but one tightly
controlled by the Communist Party. So, the Party’s fortunes are tied by their
actions and their ability to successfully bring about economic expansion. They
have created a middle class of around 350 million people a number larger than the
population of the United States. They have or are close to having as many
millionaires and billionaires as the United States. The premier luxury brands of
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5. Europe and the United States are dependent on Chinese consumers for much of
their high profits.
Few societies are able to keep talented individuals out of Government who
have the ability to motivate and gain the unconditional support of the people. We
have seen recently the rise of political leaders – to compete with the technocrats in
China.
[As on aside, the U.S., however, seems to have been able to keep talented
people out of the Government by making seeking high office such an ordeal that
many qualified people simply avoid seeking high office. And, by the high costs of
achieving high positions and the inherent corruption that goes with it. There are
exceptions like Mayor Blumberg of New York City.]
Leaders with a political bent who are charismatic leaders are reasserting
themselves in China:
The most recent example is Wen, Jia Bao, the Premier for the past 10 years
under Hu, Jin Tao. He was known as “Grandpa Wen” and frequently was in the
media becoming the “face:” of the Hu Jin Tao leadership. He would appear at
natural disasters and express heart-felt sympathies and other public events and the
people seemed to respond quite favorably to him.
Bo, Xilai – are any of you familiar with him? Few Americans are – but I
find it a fascinating insight into current China leadership – it dramatizes the pluses
and minuses of China’s current leadership and represents real challenges to the
Communist Party. The journey to change comes with one step just as the Long
March began when the Red Forces were retreating from the Nationalist Forces of
Chiang Kai Chek.
Bo, Xilai
He was born on July 3, 1949 in Beijing. His father, Bo Yibo, was one of the
“Eight Immortals” of Revolutionary China. These Immortals were Communist
Party and Government leaders who steered China through the volatile shift from
Maoism to a market-oriented economy. Bo, Yi Bo was supportive of Deng Xiao
Ping’s plan to have a more market-directed economy and a society more
characterized by the rule of law. Yi Bo was also prominent in the purging of Hu
Yaobang in the late 1980’s, a competitor of Deng Xiao Ping. Bo, Yi Bo defended
the crack down on the Tiananmen Square student protesters in 1989 ordered by
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6. Deng Xiao Ping. Bo Yi Bo traveled with the legends of Communist leadership on
the “Long March” of 5,000 miles with the retreating Communist forces in the early
days of the revolution.
His son, Bo Xilai, and others with a strong background, are popularly
referenced as “Princelings”, i.e. a son of a prominent party leader – whose
“connections” help account for his/her present high position in the Party or the
Government. Those connections gives the offspring of well known leaders a “leg
up” on the ladder of success as a high public official.
Bo Xilai was educated at the Chinese Academy of Social Sciences (1979-
1982) and Peking University (1978-1979) – and earned a non-technical degree in
Political Science. He was not a technocrat.
His second wife is Gu Kailai who played a prominent role in Bo Xilai’s
political life and fortunes.
Bo has one son – Bo, Gua Gua – educated at the Harrow elite boarding
school in England. The first Chinese student ever accepted there. Gua Gua has
degrees from Oxford and Harvard. He is believed to be hiding in the U.S. As it
happens in China and elsewhere, the sons/daughters often get caught up in the
scandals of the parents. Gua Gua was “exposed” as a profligate with a hard
charging social life by the enemies of Bo Xilai, as part of the struggle between the
Pro Bo and anti- Bo leaders of the Communist Party.
I guess it is not always fun to be the son of a prominent politician in China
or even in the United States.
Early on, Bo was the mayor of Dalian on China’s northeast coast – this is
where the Beijing high officials spend part of the summer when Beijing gets very
hot. As Mayor Bo Xilai quickly flaunted the Communist norms by flagrant self-
promotion and personal extravagances in a highly public manner. A true populist,
very much contrary to Deng Xiao Ping’s philosophy and the technocrats running
the Communist Party and the Government. For example, in Dalian he enjoyed
showing visitors his ability to control the color of the water in a fountain on the
plaza from his office window.
He openly campaigned for a seat on the Politburo Standing Committee,
which acts as the highest policy-making body. It currently has 7 members only,
having recently been downgraded from 9 members as Xi jin Ping became
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7. President, Secretary of the Communist Party and head of the military. Bo became
the Governor of Liaoning, the province in which Dalian lies. He then became the
National Minister of Commerce in Beijing. Bo’s last position was as the Secretary
of the Communist Party of the Chongqing branch.
Chongqing touts itself as the largest city in China – of around 25 million
people – it is located in southwestern China, not very far from Tibet and is
surrounded by mountains. It is on the banks of the Yangtse River that runs from
Tibet to the ocean at Shanghai on the East Coast of China.
Bo revived the cultural revolution-era – which was a very bad time in China
for Government and Party leaders – he promoted the “red” culture of egalitarian
values. Cultural revolution-era songs were broadcast over a public address system
throughout Chongqing. He aggressively sought to have foreign businesses relocate
to Chongqing. He e-mailed thousands of citizens of Chongqing some of Mao
sayings. He was the champion of the New Left – The “New Left” are the Maoists
and Social Democrats disillusioned with the excesses of market-based economic
reform. I think we in the West would view him as a conservative.
Bo put substantial assets into social programs and prosecuted over a 1,000
members of organized crime. Many were executed and the rest imprisoned. He
was largely unchallenged in Chongqing. Even the mayor of Chongqing was no
match for Bo’s strong charismatic personality. So Bo’s rise to power was
characterized by aggressive social programs and crime fighting in a highly public
manner not seen since Deng assumed power in the late 1970’s.
As an aside politicians seem to naturally recognize crime fighting, economic
development, social programs and nostalgia as pathways to political success.
Bo would have been a member of the Standing Committee of the Politburo
except for an event which was exposed by a close confident – serious misconduct
which he came very close to avoiding responsibility and consequences.
Here is an abbreviated overview of the events which here fascinated the
Chinese people and China watchers as well. Bo’s wife, Gu Kailai, a prominent
practicing attorney also handled much of the side businesses of the Bo family. Gu
and Bo were closely allied with a prominent British businessman, Neil Heywood.
They had been allied for many years and participated in many projects together.
All became very wealthy due to these economic ventures. Heywood was allegedly
involved in the laundering of substantial monies generated by these various
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8. projects for Gu and Bo. Bo’s Communist Party salary was very modest as the
party chief.
Heywood was responsible for Bo’s son Gua Gua getting into Harrows and
University of Oxford. There was a Chinese realty project that went bad, a rare
event. A dispute developed over the failed project leading to tensions in this long-
term and corrupt relationship. In China many multi-millionaires and even
billionaires have come out of real estate development projects. Allegedly,
Heywood held Bo’s son against the family’s will and threatened his safety during
the course of this dispute. I say “allegedly” because – the best that I can tell – Gu
Kailai is the only support for this view of reality.
Anyway –
Bo’s wife, Gu, invited Heywood to Chongqing where they met, had dinner
and engaged in a drinking party on November 14, 2011. He was found dead on
November 15, 2011 in a hotel room in Chongqing – the police chalked his death up
to excessive intoxication. The body is cremated – an autopsy was not performed.
The story would end there except on February 6, 2012, Wang Lijun shows
up at the U.S. Consulate in Chengdu. He seeks asylum. Although some deny he
sought asylum.
Wang Lijun had followed Bo from Dalian and through various positions to
Chongqing, where he became the Chief of Police of Chongqing. He led the
investigations into the organized crime groups in Chongqing giving Bo a national
reputation for busting organized criminal groups. And, making himself a national
figure as well. As indicated, over 1,000 people were imprisoned or executed. The
problem was Wang was not comfortable with the way Heywood died and his role
in it. Or, he simply wanted to ensure Bo was aware of his wife’s actions.
Originally, Heywood apparently was to be shot, but instead Gu got Heywood
intoxicated to the extent of incapacitation and gave him medicine to alleviate his
ailing stomach. The medicine was arsenic. Clearly, Wang Lijun was complicit in
the death of Heywood and helped cover up his murder. Wang Lijun tells the
consulate everything – it is recorded – the consulate denies him asylum for his
well-known excesses as police chief and for his well-known corruption. Bo sent
armed soldiers/police to the neighboring Sichuan province’s capital Chengdu –
which strikes me as unusual for one province to send armed men to another
province – they surround the U.S. Consulate. It also demonstrates the power and
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9. authority of Bo in Chongqing. Remember he was not even a member of the
Government.
The U.S. negotiated the turnover of Wang to the Beijing authorities. We
don’t know the details. My guess is the Chinese Government agreed not to execute
Wang. Last fall, he received a sentence of 15 years in his 2-day trial. He was
charged and convicted of:
Defection (going to the U.S. consulate in an effort to defect).
Power abuse.
Bribe-taking.
Bending the law for selfish ends. This is believed to be the
unauthorized electronic surveillance of National Party and
Government leaders in Beijing.
Can you imagine the arrogance of the wire-tapping of senior officials in
Beijing? This is one of the rumors regarding Bo. Many rumors spread across
China via the internet. One was the alleged mobilization of some army units in the
Beijing area to contest the power of the National Government. Many Beijingers
swear they saw military roadblocks and troop movements in Beijing during this
period of time. I have noticed that many, if not most, Chinese politicians seem to
ally themselves with one or more military leaders. And, the more powerful they
are, the higher the rank of the military ally. In my mind, this is somewhat
disturbing.
Apparently, Wang Lijun’s gambit of going to the U.S. embassy paid off for
him. He put the United States in a very difficult position, which was handled very
well by the U.S. and the Chinese Governments.
Gu Kailai’s trial this last fall for the murder of Heywood lasted 2 days. In
China, the Communist Party controls the prosecutors and the judges. All are
answerable to the Communist Party under traditional Communist ideology. And, if
you expect leniency, you must plead guilty or not contest the charges. Gu was
sentenced to death, which sentence was suspended for 2 years. It is expected due
to her “cooperation” and her alleged motivation to murder was to protect her son’s
life that the sentence will be reduced to life imprisonment.
Bo is in a prison near Beijing, a prison which is primarily reserved for high
officials and sensitive cases. He has been expelled from the Communist Party and
from the People’s National Congress thereby stripping him of his legal immunity.
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10. This sets the stage for his trial. The Politburo of the Communist Party, not the
Government, has alleged various criminal acts by Bo:
Bribe-taking.
Abuse of power during the murder investigation – attempting to cover
the murder up and sending armed officers to surround the U.S.
Consulate in Chengdu.
Inappropriate sexual relations with multiple women. The
Communists in this area of sexual relations remind me of the old
Puritans in the U.S.
While Bo has not been formally charged, this scandal – the worst since the
Gang of Four at the end of Mao Ze Tung’s rule which gang were imprisoned at the
end of the cultural revolution – including Mao Tse Dong’s wife – is set against the
struggle for power between various factions within the Communist Party. The
Party may be morphing from the party controlled by the technocrats to a more
political and populist leaning one which appeals to the masses – from problem
solving to slogans – sort of what we have in the U.S. currently.
Wen Jaibao and his family, the premier until this year, were recently
“exposed” by the New York Times as billionaires. This exposure, despite intense
censorship, has convinced many that Communist Party leaders are corrupt, venal,
not subject to the rule of law and in fact acting above the law, which are all
contrary to the ideology of the party and its expressed principles. It should be
noted Wen denies the allegations published by the New York Times.
President Xi Jin Ping has made corruption a high priority by saying his
Government will attack the dragons and the flies, i.e. big and small corrupt actors.
The role of the internet has proven most interesting – you have heard of the
great firewall, i.e. the efforts of the Government to control content on the internet.
Google left mainland China over these issues and relocated to Hong Kong which
has a degree of autonomy from Beijing. Hong Kong elects its own Government.
Despite this very real firewall, it is very common for individuals who have been
allegedly abused by a high official to complain on the internet which is
immediately picked up by other activists and spread quickly all over the internet
and the country. Numerous officials have lost their jobs, been sent to prison or
otherwise punished as a result of such exposures. The internet is proving difficult
to control. Muckrakers become instant celebrities and are difficult to suppress,
particularly since they are saying what the party espouses – such as no corruption
by the small or the important and by factually supporting their allegations of
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11. corruption. Here many of the muckrakers use the Western media as a shield and
rely on them to prevent their arrests due to the threat of exposure in the Western
media and over the internet in China. Corruption is engrained in the current
system of Government – bribes are understood as a way of getting things done.
Many political dinners will include a businessman who will bring gifts and
pay for the dinners. This appears to be the main purpose for the invitation to the
business person to attend.
Bo – while a true leader and clearly talented and who was genuinely
respected by the populous – was also clearly corrupt in the broadest sense of that
word. Money – yes, but also acting above the law, he would have gotten away
with at least the cover up, if not his involvement, in the murder of Neil Heywood,
if Wang Lijun hadn’t gone to the U.S. authorities. When Wang told Bo of his
“suspicions” of his wife Gu’s involvement in the murder, Bo physically slapped
Wang across the face and threatened him.
Bo, for his part, continues to refuse to cooperate with his former colleagues
and the police claiming to his interrogators that they have no right to question him.
He may be counting on his many supporters in the Party Government to “save”
him. Remember Bo was at the pinnacle of power and knows as much as anyone
about the corruption of the high party and Government officials. I think that is
unlikely that Bo avoids severe punishment given the President and Party Chairman
Xi Jin Ping’s public commitment to eradicating corruption at all levels of the
Government and the Party. President Xi has made this a main policy of his new
Government. And, most Chinese are clearly watching to see what happens in the
Bo case.
While there is no question that Bo has supporters high and low in China and
in the Party – but, I believe – there is little choice but to severely punish Bo.
However, in prior cases, when a high official receives a harsh sentence it would
later be commuted to house arrest. This may be difficult in Bo’s and Gu’s cases
unless they suffer severe “health issues”.
Bo, in determining a course of action, needs to think about his son and even
his wife whose execution has only been suspended for 2 years. The practice and
custom is not to have a real trial, but to accept the Government’s charges as true
with some tacit understanding of the sentence.
This case represents very significant cross-currents in modern China.
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12. First it demonstrates without question the corruption of a leader at the
highest level of the Communist Party and the Government.
It impacts the public in that it validates the suspicions/beliefs of the
corruption of high Government and Party officials.
It is perceived by the Party elders as threatening the very success and
survival of the party itself.
Xi Jin Ping has made corruption and its elimination at all levels of
Government and the Party a central policy of his new Government. Failure to take
dramatic actions in this area will adversely impact the Party and its legitimacy.
So far Xi has done symbolic things to demonstrate his seriousness to address
corruption. He has banned extravagant dinners and functions for Government
officials. The immediate result has been the substantial decline in the sale of fresh
flowers and a real decline in patronage of fancy and expensive restaurants. A
fancy dinner for eight in Shanghai can easily cost $3,000.
If the Communist Party is not able to gain some sense of trust by the people,
it could be increasingly difficult for the Party to maintain exclusive power. While
economic growth has become everything in China – these kinds of abuses are not
readily acceptable to a significant section of the population. And, now that it is an
open and public discussion, it will not be easy to put this genie back into the bottle
without significant progress.
One thing you notice in recent years is the rise of appeals to Nationalism.
You see mass demonstrations against the Japanese, many organized by the Party or
the Government as, for example, the dispute over uninhabited islands in the
Eastern Chinese Sea or over other political disputes between these two Asian
giants. Similar appeals have been aimed at the U.S. and our alleged interference in
China’s claims to the islands located in the South China Sea. Disputes are ongoing
with Korea, Vietnam, the Philippines, Brunei as well as Japan. These disputes are
becoming increasingly characterized by military provocation.
The rise of the military is another area of concern. Xi Jin Ping has openly
courted the military. You will see increased military budgets, more aircraft
carriers, drones, aircraft, rockets, etc. One Chinese Lt. Colonel wrote a very
popular book about war with the United States – Interesting Times.
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13. In today’s environment how does all of this translate into U.S. and Western
businesses prospering in China? China is clearly recognized as an economic
opportunity for many Western businesses. My wife Ruby has been involved in
setting up U.S. businesses in China. The short answer – in my opinion is that
China remains a place where Western companies can do business successfully in
that they perform a very positive role for the Chinese economy in the transfer of
technologies and business practices to the Chinese and creating millions of jobs;
and, in giving Chinese products access to markets to which they otherwise would
have limited access.
The trade off is substantial profits to the Western and Japanese companies
GE has done very well in China from light bulbs to medical equipment and jet
engines. GM’s Chevrolet brand automobile is a major seller in China.
The short history of modern China has set out some broad outlines of some
things for business people to avoid – for example, partnerships with local China
companies have proven difficult.
Dannon, the yogurt company from France, went into partnership with
a local company to ultimately find itself on the outside looking in –
having largely lost its business to its Chinese partner.
GM found its blueprints for a new line of cars stolen and being used
by a competitor.
Intellectual property – an interesting area. Historically, Chinese view
intellectual property as products of the mind that belong to everyone.
This view is changing. As China invents more and seeks protection of
its inventions, it will naturally want to protect those ideas and
inventions as economically valuable. The Government’s position is
officially pro-protection of IP. But, the practice has not caught up
with the Government’s position yet. Handbags, Hollywood movies,
etc. are still readily available, but not as much as 5 years ago.
Ming vases were originally made in Southern China during the Ming
dynasty. The fake Ming vases are made from the same mud and kilns
as the originals with the same designs and appropriately aged at
various Chinese factories. The Ming chop or seal is applied by a
different shop. Imitation is an old and cherished art in China – often
the imitations are better than the original.
The Western companies are not targeted for copying any more than
the Chinese companies. The test is whether the product is popular and
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14. in demand and if the Chinese imitators see a profit in it. Not the
origins of the idea or product.
To combat this phenomenon, some Chinese companies have employed a
technique of multiple locations for their factories with each factory manufacturing
a portion of the end product which are assembled then elsewhere – thereby limiting
to a few the complete knowledge concerning the technical aspects of the product or
its techniques of production. Security of IP is a necessity, both of techniques of
production and the product itself.
China has similar fraud schemes as we experience here such as: false
invoices; supplies or parts inferior to what you ordered; theft by employees; and,
extortion efforts. It is somewhat magnified in China for the foreign businessman
because they are not sure how to combat it, whether the police will investigate you
or the alleged crooks – the unfamiliarity with local customs, law enforcement
attitudes, etc. makes dealing with such issues more difficult for a foreign business
than for a local Chinese business since they intuitively know how to handle it.
You have heard, undoubtedly, of the various sayings or stories describing
various situations in China, such as Confucius says. Well, I defy you to offer a fact
pattern that won’t remind a Chinese educated listener of an event that happened
100, 1,000 or even 5,000 years earlier which would guide a perceptive listener to
the correct response to the current situation under discussion.
Let me give you one example: a Chinese businessman – leading a substantial
trading company in China – related to us how his warehouse was looted by several
employees over one weekend, taking millions of dollars of inventory. These
workers had come to be employed by the company eight years earlier for the
expressed purpose of looting the company. The businessman admired their
patience, their planning and the execution of the scheme. He lamented his loss.
Favorable relationships with the Government are of paramount importance.
It is important in the U.S., but much more important in China. With frequent
policy changes, and changing enforcement practices, it is hard to stay out of issues
with the Government unless you have solid relationships with, particularly, the
local government where you do business.
In the U.S., larger corporations spend millions to influence and to get along
with the Government, with congress, with the regulators, with the military, etc.
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15. I, being a former prosecutor, use to say very few of us could stand up to
rigorous investigation without being exposed for some wrongdoing. Many times,
you may not know what you did was illegal. I defended a client recently who
transported in his truck paint and solvents, etc. from one location, to his new
factory about 40 miles away. He failed to get an EPA permit to transport these
chemicals. He was prosecuted even though he had no criminal record. He was
found guilty and sentenced.
We are familiar with many common practices but which are technically
illegal in China such as:
In mine safety. Many miners die each year in unsafe mines operated
contrary to the established laws.
Misuse of intellectual property, such as the sale of fake handbags,
blueprints for a competitor’s line of cars, movies, etc.
Safety standards in various industries.
Work hours, conditions and pay. Foxconn, a Taiwanese company
who manufactures the Apple IPhone, was recently investigated and
cited for unfair labor practices brought on by a high suicide rate
among its 100’s of thousand employees.
Food safety. I will address this one shortly.
Etc.
The Chinese economy benefits substantially from the Western businesses,
but you should keep in mind that Chinese companies always want to fill your
niche. A primary obstacle to Chinese excluding you from the market place is that
Western businesses have connections they can’t or haven’t yet obtained.
For example:
Hua Wei – a giant Chinese telecommunications business – can’t sell
to the U.S. Government due to a lack of trust deriving largely from its
military background. This means, effectively, they can’t sell
telecommunication equipment to U.S. Government or to companies
that do business with the U.S. government.
Chinese businesses often lack the contacts with you or your
customers.
The IP laws protect your product from being imported into the U.S.,
etc.
One trend I have noticed is the Government – and remember, while there is a
tendency to think of the Chinese Government as a monolith – actually, there is
15

16. often real tensions between the National Government in Beijing and the cities
outside of Beijing. It is not uncommon for the province to ignore edicts from
Beijing. And, remember these leaders, local and national, have strong power bases
of their own.
Any level of Government, and more likely the local Government, will at
some point in your business cycle, whether caused by some act of your company or
a complaint from a competitor, your workers, etc., can become a problem for your
business. You need to curry favor with the regulators (just like we do in the U.S.).
Look what happened to Google – they left mainland China for Hong Kong because
they couldn’t get along. It has cost them financially a great deal. The result has
been that the Chinese competitors have virtually excluded Google from the search
engine business in China.
Another recent trend is for the Government to be focused on holding the
large Western firms to the legal standard whether those standards have been
enforced by the Government previously or not. While it may be good for Chinese
society as a whole, it still is disrupting to your business.
KFC – for example was punished for selling “bad” chicken purchased
from its Chinese suppliers. It caused a 6% drop in sales due to this
bad publicity. And, resulted in the parent company’s stock to drop on
the U.S. Stock Markets.
Apple and Volkswagen have been taken to task recently for its
Customer Services policies which allegedly are less favorable in
China then elsewhere in the world. There was a 2-hour program on
China Central Television focusing on these two companies and their
service policies as practiced in China and how they were less
favorable than in the U.S. The focus on Volkswagen was for selling
substandard gear boxes in China.
McDonalds and the French Grocer Carrefour have been through this
in the past as well.
It is also important to establish good working relationships with the workers
– human resource programs if progressive work well. I have a client who treats his
Chinese workers in a very disrespectful manner. That has led to problems with the
Government; to numerous work stoppages; theft of supplies and parts; and even
problems with suppliers, who don’t get good service from his employees when
they deliver supplies, and materials, etc.
16

17. The value of his business has declined from around $25 million to maybe $4
million today. This does not even account for the fact that he has to spend a great
deal of management time to problem-solving and not business expansion.
Bo Xilai was very good at bringing favored Western businesses to
Chongqing. Ford is located there. In this respect, it was good for China by
creating jobs far from the more rich coastal cities to where many are under-
employed; it was good for the Western companies that located in Chongqing and it
was good for Bo Xilai and his family who grew rich from the associations.
U.S. businesses complain about China and how difficult it is to do business
there. [By the way, so do the Taiwanese who claim they make no money in China
– however, I don’t see them leaving China despite their claims of poverty. Many
have been there since the 1990’s.]
It is important to have a carefully thought-out plan. You need advisors or
experienced Chinese executives you can trust, and to have redundant checks and
balances to keep them honest. You need to establish good working relations with
the local Government and with the customs officials. Most U.S. manufacturers
export some or all of the goods they manufacture in China.
The Chinese preference is to do business with “friends”. That means an
investment of time in cultivating relationships is required. This requires gifts,
entertainment and time socializing.
It doesn’t have to be corrupt. Law firms in the U.S. spend substantial sums
entertaining clients and potential clients all the time in the United States.
The lure of the riches to be made in China is so strong that some
Western/Japanese businesses will exchange money or favors making leaders like
Bo wealthy via corruption. It aided Bo in acting as if he was above the law. In this
case, he would have remained so if he had made his police chief feel secure as
opposed to fearing for his life.
Bo is estimated to be worth hundreds of millions of dollars.
Guanxi – I understand your professor has spoken about this, so I won’t
repeat it here.
Presents are expected.
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18. Dinners – as much as $3,000/meal are all too common.
Let me end on a negative note. The U.S. has a statute called The Foreign
Corrupt Practices Act that prohibits bribes to gain a competitive advantage in a
foreign market by a U.S. company. The question is where is the line drawn
between corrupt practices and relationship development.
Of course, the line is initially drawn where the U.S. prosecutor says it is –
obviously after spending a few hundreds of thousands of dollars you will learn if
the Government properly drew the line. A very risky proposition at best for your
business.
The U.S. Department of Justice has a stellar record in this area and is
bringing in billions of dollars to the U.S. Treasury in fines and settlements.
Despite all – doing business is not really all that different here than in China.
Corruption may not be as pervasive here, but in one of the prior
administrations in St. Louis, the real estate/zoning attorneys all knew the cost of
having a zoning ordinance changed. And they were not talking about a publish fee
but money to cause the elected officials to act. In my estimation, just old fashion
bribery/extortion. By the way, in the U.S. extortion is not a defense to bribery.
The U.S. prosecutors often overcharge defendants, and their families, to get
pleas of guilty. Is that corruption?
The U.S. court system has become much more ideological and political. Is
that the rule of law?
China suffers similar problems, but nimble businessman can and are doing
quite well in China. As long as you understand your environment and the rules of
the game, you can be successful. You may need to be able to think a little Eastern;
have good advisors, and, have contingency plans should things go wrong. Many
Chinese have contingency plans should things go wrong. Many obtain green cards
for that primary purpose, with no real intent to leave China unless necessary.
You need to be well financed because your diverse Chinese competitors
often have Government backing and can receive bank financing even when losing
monies several years in a row.
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19. Despite everything I have said, I am very positive on China and believe it
represents a very favorable climate for U.S. businesses. However, like I do in the
cases I litigate, I prepare not for the best circumstances, but for the worst
circumstances. I’m never, therefore, really surprised by my opponents.
Professor Meyer asked me to comment on the recent changes in the Chinese
leadership. I can share my perspective – which could be totally wrong.
First, I think the lack of an intellectual basis for the Communist Party being
in power has caused the Communist Party to fall back on economic development to
hold onto power. Not all bad and they have accomplished impressive things in this
area. And, clearly, China is better off today in almost every imaginable way. But
people like to have guiding principle to make sense of their world. Guess I am
saying materialism is not enough. People need something else. The party has not
come up with that grounding yet – just holding onto power won’t work forever. It
is an issue that needs to be dealt with and continued economic expansion will not
be enough forever.
China experiences major demonstrations, violent strikes and demonstrations
by the thousands each year. You read about what appears to be random and
atrocious violence in China. A man stabs a number of kindergarten children, a
middle class man, after an altercation with a police officer, leaves and returns to
police station with a butcher knife and kills several officers.
The stresses of modern life in China and the emphasis on materialism and
the great economic expansion is disruptive – taking land for factories from villages
for example – tensions can become violent easily. I mentioned Foxconn where
workers felt so much pressure that they began committing suicide at the factories.
How has the party and government responded? To some extent they appeal
to nationalism. This can be an ugly emotion. Sometimes the focus becomes our
problem. When it focuses on the Japanese or the Americans, etc. – Nationalism
Works to unite the population. Particularly, in China if the focus is the Japanese. I
think it is probably impossible to watch TV on any day in China where the cruelty
of the Japanese in World War II is not dramatized.
In the short run, a government pushing that agenda can find it can channel
the emotions of the populous and great violence can occur but it can’t always be
controlled.
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20. China needs more constructive emotional appeals to its population.
The recent change in leadership was peaceful – which has not always been
the case in China.
Xi Jinping is not well known in the West. He clearly is intelligent and has
the reins of power in his hands heading the government, the military and the
Communist Party.
There seemed to be little serious opposition to him assuming these positions
of power. The Central Committee of the Politburo – of the Communist Party has
been reduced to 7 members. Not sure why but I am convinced it was the result of
serious rivalries within the party.
It appears that 4 or perhaps 5 of these positions are filled by men associated
with a former president Zhang Zemin. I believe he is 86 now. He apparently
wants to be a power broker.
It appears the prior President Hu Jin Tao’s people have largely been
excluded from the politburo central committee.
Where does this leave Xi Jinping? China is very much a consensus society.
Its former president is influencing policy and another former president is not being
heard very well. Is Xi Jinping really in control? In this situation, he can be a
powerful leader or is he constantly being forced to form coalitions to run the
government. Does he reach out to the military for a much closer alliance to
influence the other political leaders? No one in China’s political circles has
forgotten Mao’s famous statement that “power comes out of the barrel of a gun.”
The rise of the Chinese military is a concern. President Xi has clearly
indicated a desire to increase the strength of China’s military forces.
It is interesting to speculate but the Chinese are a very clever people – so I
expect things will work out.
But it does not appear that Xi Jinping will be able to take drastic steps or
dramatic overtones – so things most likely will rock on as they have been since the
1990’s, which is not bad.
20

21. The political stresses and strains actually could be good for Western
businesses since the focus will be on economic expansion or something they can
all agree on – while they sort things out.
Much more can be said here but let’s deal with issues you may have in your
mind regarding China.
Questions
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