Cultural keys to China

The Chinese legal system is often based not on what you know but who you know. Jason Daniel writes from Shanghai. Jason Daniel is a solicitor training in Simmons & Simmons' Shanghai office.

My first mistake in coming to China was expecting it to be like Japan. I am familiar with Japan, a country which has derived many aspects of its culture from China and therefore, in theory, could be quite similar.

But anyone who comes to China with preconceptions based on experiences of another country is liable to make the same mistake. China offers many challenges including its language, its environment and its food (I had never thought about whether ducks had tongues until I saw some on a plate in front of me), and the uninitiated can find themselves highly disoriented on arrival in this unique country.

One of the keys in China to beginning to be able to predict the workings of what may seem an opaque legal system is knowing who is responsible for creating the laws and who is responsible for overseeing their operation.

For example, although the central government does not permit foreign investors to establish group sales networks, the municipal government in Shanghai has recently started issuing approvals regardless.

Such inconsistencies – between what the central government says is possible and what in practice the municipal government is prepared to allow – are common. Those at the top, as the Chinese expression goes, have their measures, and those below have their counter-measures.

So the first step for those who want to advise on the law in China is being able to identify not only the strict “legal” position but the practical position as well. To do this governmental contacts are invaluable, whether they are draftsmen at the National People's Congress or local government officials.

The Chinese make extensive use of old school contacts; for foreigners, attendance at banquets and other entertainments will need to be followed by demonstrations of long-term commitment.

The need to know the people behind the law is linked to a wider cultural phenomenon. This is that personal power and personal connections (“guanxi”) are what drive relationships and all manner of transactions and dealings.

Instead of the task culture which prevails in the West – whereby each person is assigned a role in a team, which then takes an orderly and rational approach to a problem – the Chinese are inclined to rely on personal power bases and networks to get things done.

Having established the legal and practical positions which govern what you can do, you then need to be able to identify how to do it. For this you must find out where the power is held, because your ability to achieve your goals will depend on securing the support of the power holder.

So there is a considerable gap between form and reality in the Chinese legal system. At its worst, this type of system involves corruption. There are plenty of stories of, for example, a Sony Walkman presented to the right person by the right person in the right way helping to achieve the processing of a visa which seemingly stood no chance of being granted.

But for the most part the form and reality gap does not involve anything illicit. The fact is that, despite the huge volume of new law being passed, far from all of it will be enforced and what is may be enforced with a great degree of discretion on the part of the ultimate power holder.

Having found out what you can do and how you should set about doing it, a further aspect of personal relationships which will have an impact on business in China is the high value that is put on “face”.

Causing someone to lose face jeopardises the relationship you have built up. For example, you may include in a draft document a fair clause only to have your client reject it. You may later discover that, before you prepared the draft, the power holder in the client organisation suggested to his colleagues that the clause should read in a certain way. No matter that your suggestion is the correct one, the issue of not losing face is sufficiently important to mean that often, in order to protect the power holder's dignity, his colleagues will require that the clause is amended to reflect his original suggestion.

Failure to appreciate this, by insisting that your view is correct, could damage the working relationship.

Such issues are not unique to China but they are pronounced, and success in business demands familiarity with the country's peculiarities. These spring from the different cultural basis on which the legal system is built and have their own internal logic.

A few insights into what drives the Chinese system and how to deal with the right people can help make working there less frustrating and confusing – and make for successful business in a country where opportunities are increasing as liberalisation continues.