Dealing with the Dragon

My stay in China, which began in August l991, coincided with a period of crisis in the foreign community in Beijing. Shortage of suitable office space and housing were forcing rents to escalate. Serious although this was it was the acute lack of quality expatriate schooling which caused the main concern.

I formed a group with two other like-minded people: Sabina Brady, a business woman with 10 years standing in China who provided the business/financial skills and Michael Crook, a British/Canadian born and brought up in China to advise and help with the Chinese bureaucracy. Our ambitious aim from the start in September l993 was to open a school called “The Western Academy of Beijing” on 1st. September l994.

It was clearly the right move, initial corporate backing came from GE, Motorola and Shell. The Managing Director of Rolls Royce also joined in a private capacity.

In September l993 I wrote a feasibility study for the Chinese authorities seeking permission to found an independent, foreign-run non-profitmaking elementary school in China. By Chinese law a school of this type would fall under the designation of a shiye or Social institution. At that time, all such institutions were Chinese run, funded and under a governmental umbrella. Securing approval for a shiye which had foreign independent ‘ownership’ and control, was specifically precluded under the laws governing social organisations and there was no precedent. The State Education Commission, Jiaowei were not sympathetic with our attempts to join with Chinese schools.

We chose the shiye structure over the other usual options for foreign entities because these were too restrictive, prohibitive, or counter to our philosophy and educational aims. The two other options under consideration were:

• Qiye (business) : While at first sight attractive being the usual method of business in PRC, it had drawbacks from the Chinese Corporate Tax requirements (Chinese corporate tax is paid on gross income) and problems with finding a sympathetic and silent partner (our school was to be non-profitmaking). To cover our costs and to fund a Chinese partner, we would then have to raise our fees to unworkable levels.

• Diplomatic Umbrella: The usual route for expatriate schools with onerous restrictions on nationality and not compatible with our philosophy of open admission;

We were determined to proceed with a shiye, despite the formidable odds of convincing the Chinese authorities to approve the formation of a new type of shiye given that there had never been a foreign shiye, nor indeed any foreign school outside of the diplomatic umbrella, and further it was counter to Chinese regulations. It required initiative and inventiveness to find a legal solution that would be acceptable to both the Chinese authorities and the sponsors of the school.

Our solution was an Educational Trust set up in Hongkong which would provide the external legal identity to allow a Social Trust to be set up in Beijing. The Educational Foundation would be registered as a shetuan (social organisation) – even though the establishment of a foreign owned shetuan is also specifically precluded under the laws governing social organisations.

By late December l993 we had established “The Western Academy of Beijing Educational Foundation” in Hong Kong.

However, we still needed the Foundation recognised in Beijing by the PRC Ministry of Law. A way was found. A Notary Public in Hong Kong, accredited and recognised in PRC,notarised the Trust Deed. The Trust Deed was then taken to the Office of the Ministry of Justice of PRC in Shenzhen for certification. Armed with this, we could then get our all important seal cut in Beijing which enabled us to open Bank accounts write cheques and sign the lease for the school …. . It was now late March l994!

Whilst the legal framework in Hong Kong was clear, the corresponding transparent legal framework in Beijing was not. At every turn we met with brick walls and there seemed no way forward to achieve our aim. There is fazhi (the rule of law) in China, but this is overlaid and intertwined by an older tradition: renzhi (rule by individuals). Both must be given equal weighting. Renzhi encompasses li (propriety, etiquette) and qin (personal relations – within proscribed and accepted form). It is the embodiment of the Confucian spirit. Renzhi has survived intact from the rule of the emperors and given as a legacy to the new communist rulers, this is somewhat analageous to the old feudal system in Europe, All power and authority emanates from the king (emperor) and filters down through the chain of power even to the factory floor. Every petty bureaucrat must be courted and fêted to ensure agreement to the venture.

Li, qin and fa, in order of priority and preference are the way in which people think, act, resolve problems and deal with new phenomena. Historically fa was the least desirable route; carrying with it the threat of arbitrariness, strict liability and, in severe cases, death of the entire extended family. Li and qin were invoked to ensure that the circumstances and needs of the individual were taken into account. In present day China, guanxi (the use of personal relationships through favours given and received) is an extension of the traditional li and qin . It is used to gain advantage over rules of law which do exist: to gain an audience,to secure a contract. Guanxi is the cornerstone of successful business in China and the oil which ensures that the cogs run smoothly without obstacles from the bureaucracy.

Since we did not have the requisite li or qin nor indeed the wish to ‘pay our way’ to overcome the desire of local government to flex its muscles we had no choice but to obtain approval at the highest government level. In other words to go to the centre and take the least preferred route, fa.Through support from The World Bank and 19 embassies we went to Central Government and asked for the personal approval and intervention of Li Lanqing, Vice Premier of China with the brief for education to allow us to be a legal identity, a sheyue. We were granted approval for the school on 27th January 1994. By a squeak we had our chance.

By going to the centre we achieved our aim,we now had a mandate for ensuring our existence. We had used li and qin to secure fa (an important route for achieving objectives here in China), but the li and qin was that of the World Bank and not our personal li and qin. We still needed the school to be registered by Beijing Municipality Education Bureau (BEB) since all primary and secondary schools are the responsibility of local, not central government. Lack of li and qin ensured that they felt no obligation towards us nor relationship with us.

BEB were mandated by the State Education Commission (the centre) to register us according to the law but they did not wish to do so. From their perspective we were wresting a favour from them without having gained guanxi and the long-term mutual obligation this establishes. This we now set out to remedy. We are now building a long-term li and qin with BEB.

We had come up hard against the inherent contradiction of centre vs. regional. This is perhaps the hardest thing for foreign businessmen to understand: the conflict of centre/regional, fazhi vs. renzhi, the need to balance this and give benefit to the Chinese parties within a foreigner’s sense of ethics.

This problem of centre vs. local is not only confined to central government vs. Regional but also at all levels of Chinese society: City vs. Bureau, Bureau vs. factory. After much negotiations we signed a 10-year renewable contract with The Beijing Textile Machinery plant for a school building complete with nursery, sports field and greenhouse. This contract was signed by the factory director during a very brief window of time when factory directors had the authority to lease out state/government property to resolve insolvency problems. The authority has now reverted to the centre and is now on the Bureau level. This has necessitated some contractual renegotiation.

To compound our problems there are also a tradition of rivalry or power play between and among departments in China which ensures that all departments operate on vertical lines. There is no contact between the various departments of state except at the top. Even though we had been granted a right to open by State Education Authority we had to start over again with the Customs authority. In addition, we had been registered as a Chinese shiye with foreign ownership. Chinese schools are allowed all educational materials free of duty but they do not import the types or sophistication of equipment we wished to import. Intervention (li) from The United Nations eventually allowed our educational equipment to come out of customs: the last coming two days before the school opened!

Notwithstanding all this, the Beijing Educational authority did register us. When the school successfully opened on September 1st. l994 it was opened by the acting ambassador of World Bank, Mr. Ramgopal Agarwala and by Li Shunxing, Head of China Education Association for International Exchange, The State Education Commission. Hu Zhaoquang, Vice Mayor of Beijing in charge of Education also toured the school. We had been accepted.

The school now has 226 pupils under the aegis of Ian Rysdale, Headmaster and the educational help and support from The European Council of International Schools. The clarification of the legal status of the school in the PRC will be the result of retrospective legislation. Meanwhile the school is accepted, secure, successful and growing.

To date we have not yet achieved all of our aim. The Educational Foundation has still not been recognised in PRC as a Chinese shetuan. We are not alone though in this endeavour; even the Ford Foundation with a huge annual budget has not succeeded in becoming a shetuan : they are currently registered as a qiye (business). We would still prefer to be registered as a foreign shiye and not as a Chinese shiye with foreign ownership. Retrospective legislation passed this March has given us a legal existence we shall achieve the rest when the powers-that-be become used to us.

Are there any lessons in this for joint ventures in China?

The growth of China has seen considerable stress on the infrastructure both in being able physically to set up a business and in terms of running a business.

Like everywhere, in order for things to work out it has to be to both party’s advantage. In the West management talk about “win win” situations: China talks about seeking mutual benefit and cooperation. Successful ventures realise that the two sides are using different language to achieve the same aim but not from the same starting point. The foreigners prefer fazhi, the rule of law and fairness, as the basis for society, the Chinese prefer renzhi, the Confucian route based on relationships and contacts. The two are not mutually exclusive. To be successful in China a foreign concern needs to be aware of this and build relations with his Chinese partner while negotiating his contractual relationship.

However, from a foreigners’ point of view it is heartening that corporate legal system in China is evolving. There is a recognition that stronger business law is needed to attract foreign investment. The China Securities Regulatory Committee (CSRC) is looking at the issue of corporate governance. If the rule of law held sway then the individual power holder would not matter, as there would be checks and balances to ensure any office or officer did not exercise abusive authority. The inherent historical aversion to invoking fa and the reliance on a non-legal system where li and qin hold sway must be overcome by the authorities if China is not going to be held back by corruption from her rightful place in centre stage.

Within China we did not have the legal framework we needed to begin with but we did gain high level support. To use li and qin to secure fa is a time-honoured route in China. The good news is that the Chinese were pragmatic and were adaptable in allowing this venture to proceed as it was in everyone’s best interest. Using our school as its model legislation to amend the Social Laws governing Shiye and Shetuan were passed this March.

Finally, in the twilight of the Deng era, it is interesting to reflect on his description of Hong Kong and mainland China coexisting as “one country two systems”. To the Western trained chartered secretary, the legal system in Hong Kong provided a comfortable and understood existence for the school that it is allowed to exist in, and be recognised by, The Peoples Republic of China while the Social laws to formalise our existence are in the process of being drawn up. Such a flexible existence is less comfortable to the Westerner but perhaps being “one school two systems” is an indication of how the maxim will be implemented and mutually beneficial ventures will be assisted to thrive.

August l995
Hilary Munro BA (hons) ACIS

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