The Death of Guanxi

I was recently ranting to Steve Dickinson that people who think guanxi is the key to doing business in China don't understand China's legal system and are probably functioning with the misconception that China's legal system is unreliable. He didn't state whether he agrees with me or not, he simply said guanxi is dead, and pointed me in the direction of an article he recently wrote for China International Business entitled, Debunking the Guanxi Myth. Check it out, it's worth the time, and I've taken the liberty of republishing the four basic points Dickinson argues to bust the myth of guanxi.

1. No foreigner can recreate a Chinese-style guanxi network. In China, guanxi refers to a vast network of connections arising from party, family and work connections that may go back several generations. No guanxi network relies on a single individual. The elimination of one member of the network is therefore not fatal. Foreigners almost always rely on only one or two individuals for their supposed connection. This kind of network is too fragile to be of enduring value. Foreign investors who think they have created a guanxi network in China are usually simply deluding themselves.
2. Connections with local government officials are short-term and can be abruptly terminated. Many foreign investors do not realize that government officials in China are regularly moved from office to office and from region to region. As a result, the connection with a local official is unlikely to be a long-term connection. It is quite common to negotiate a project for several years and then learn that the official in charge has been transferred to a new post. Where the project is not in compliance with the law, their replacements will often refuse to sign the documents that have already been negotiated.
3. The Chinese provider of guanxi may suddenly disappear. If the project depends on the protection of a single individual, what will happen if that person dies, is demoted, or prosecuted for corruption? This change in fortune can be a particular disaster where the foreign investor has already contributed funds, because the project can be cancelled with no refund on the investment.
4. A project based on guanxi gives too much power to the Chinese side of the deal. In many cases, the provider of guanxi will make use of the fact that the project is not in compliance with the law to ask for additional benefits. Since the foreign side has no legal recourse, the foreign side must accede to what is in effect a blackmail request or risk the collapse of the project. When the foreign investor comes to a lawyer for help, there is nothing that can be done, since the project itself is either illegal or poorly documented.

In my opinion, "guanxi" refers to the period of time in China from 1980 to 2000 as depicted by books like Mr. China, which essentially advise finding Chinese solutions to Chinese problems. The period in China when the only way to protect your interests was through political connections and bribery is rapidly giving way to a reliable legal system. It's now better to have a good contract than a seemingly powerful friend.

Tangential to this subject is a post by Dickinson's partner Dan Harris over at the China Law Blog called, Chinese Cultural Awareness Simplified: Don't Be an Asshole. Harris argues that "knowledge of Chinese culture is secondary to knowledge of business when it comes to doing a China deal" and that point is very similar to the point argued in this post that guanxi is secondary to knowing and complying with the law.

Comments

[Thomas Chow]

I disagree. Guanxi is not dead. It is just nearly impossible for us foreigners (ABC's 99.99% of the time included) for us to tap into. For those who do have the networks and connections, it is quite alive and well. (though perhaps more subtle)

[Travis Hodgkins]

Thank you for the opportunity to clarify my blanket statement, Mr. Chow. I believe guanxi is dead in terms of it being something that can dazzle expats with dreams of making it rich in China. Trying to break into Chinese guanxi is like trying to catch a leprechaun with the hope that he will lead you to a pot of gold at the end of the rainbow. Guanxi is dead in the sense that expats just aren't buying into it anymore, which is why I said it applies to an era of foreign investment that has come and gone.

I also think that traditional Chinese guanxi is eroding and becoming less important. The intricate network of family relations is less important because more education and more industry means greater opportunity. We all need to network but we don't need our second cousin once removed to get a us a government job because there is ample opportunity to make it on our own, and the same is becoming true in China.