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Last Updated: Monday, 21 March 2005, 23:55 GMT
Legal issues spook China investors
By Jonathan Kent
BBC correspondent in Kuala Lumpur

As one of only 18 non-mainlanders licensed to practise law in the People's Republic of China, Taiwanese lawyer Steve Chu has the audience in Kuala Lumpur eating out of his hand.

Steve Chu
Mr Chu says doing business in China can be risky
Having qualified at the New York and California bars, Mr Chu is offering his take on participating in the 21st century's answer to a gold rush.

What he presents is a litany of caveats and pitfalls, an hour long warning of the problems of doing business in China.

A crucial difficulty that often arises is linked to contracts.

Many mainland Chinese are finding it hard to grasp the importance of contracts, despite them being deemed essential by foreign investors, Mr Chu believes.

In addition, there are systemic difficulties.

"No one knows how many laws there are in China," he says, observing that central and regional governments often pass bills that completely contradict one another.

"A municipal or local congress is supposed to inform the central government within five days of passing a law.

"But there's no penalty for not doing so and many choose not to."

Discreet lobbying

Usually, a country's legal system offers business people guarantees of recourse in the event of a dispute.

Construction work in Shanghai
Trust is key to get anything done in China

But China's contemporary body of laws only date back to 1979, and like the country itself the legal system is fast evolving.

Unlike in the West, where discussion papers presage legislation, in China laws are tried out and then pulled back in for an overhaul.

The situation is fluid to say the least, and potentially risky, Mr Chu insists.

Major business disputes in China tend to be closely watched by foreign embassies, which often engage in strong but discrete lobbying when things go wrong.

"Any government should treat business with or investment in China as a national security issue," he opines, insisting that "it's irresponsible to let businessmen find their own way".

Lack of trust

Scare stories abound.

Mr Chu believes many have fatally misread the mainland Chinese character, which he argues has been shaped by history.

A man hauls a tricycle load of beer past a billboard promoting a commercial complex in Beijing's central business district
Both Chinese attitudes and commercial law have evolved

The Singaporeans famously got burned in the early 1990s with the building of a business park outside Shanghai. The park flopped when a local competitor build one even closer to the city.

A decade earlier, Taiwanese and Hong Kong businessmen steamed in, thinking that as 'Chinese' themselves they'd have no problem setting up there.

What overseas Chinese find particularly hard to understand is the full impact of the Cultural Revolution, with its wholesale betrayal of people by their friends, neighbours and family during the ideological witch hunt of the mid sixties.

"That's the deepest scar people have in China today," Mr Chu says.

Ingrained distrust makes building a relationship with Chinese businessmen tricky.

And yet, once trust has been built, guanxi - or relationship - becomes as much the key to business in China as contracts are not.

A mainland businessman may treat the terms of a contract, already signed, as advisory, not absolute.

Guanxi on the other hand, with its 'I know you, you know me, we have history', and the face that can be lost from abusing that relationship, is the key foundation for business.

Francis Yeoh, chairman of he Malaysian company YTL, which owns Wessex Water and other utilities in Britain and Australia, smiles knowingly when asked about China, before reciting a telling tale.

"[Malaysian sugar baron] Robert Kuok went into China and built hotel, but Robert was prepared to take a risk and build a hotel on a 10 or 14 year lease," he says.

"You can't make your money back in that time, but he was prepared to bet that he could win an extension when his lease ran out."

"Guanxi, not contracts, is what it's all about."

Cheap quality

Others in Malaysia are fervent cheerleaders for China.

Tan Kai Hee, advisor to the Associated Chinese Chambers of Commerce and Industry Malaysia, is adamant.

"China is very safe," he says.

"As Malaysian Chinese, we know how to speak the language and we share the culture."

Mr Tan's company Hai-O Enterprse imports beer, medicated wine and health products from China.

"Chinese products are very good in quality, very cheap in price," he says.

Moreover, improving the rule of law in commercial disputes cases has been a priority in China, and this has had an impact, China watchers say.

Some even insist that the country's one party rule is the biggest obstacle to the strict enforcement of the rule of law and the central decision making on sensitive issues.

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