Lessons from the WJB Wealth Revelation.

What you need to know to swim with the sharks in China.

Last week David Barboza of the New York Times posted a detailed expose revealing the wealth of Chinese Prime Minister Wen Jiabao’s family.  The extensive article puts the Wen family wealth at around US$ 2.7 billion – amassed since 2002 in an intricate web of business ventures and partnerships (see the interactive map). It is an excellent piece of reporting, and the story has a few significant implications for Westerners doing business in China.

  • First, the amounts involved are simply staggering. $2.7 billion was amassed by a small group of people related to the Prime Minister in ten years. It’s an impressive amount of money, and the methods and details reveal a lot about how China works. Coming on the heels of a similar revelation about the (presumed) incoming President Xi Jinping by Bloomberg  demonstrate that politics and financial fortune are even more inextricably bound together in China than anywhere else in the world.
  • The Times piece doesn’t make any reference to corruption, bribery or anything illegal. The numbers are high, there’s an aggressive dragon-lady type and it’s a very compelling piece of journalism – but there isn’t even a hint of accusation or implication that any Chinese laws were broken. It’s just business as usual in China. Because it’s all secret, there is no restraint or check on the impulses of family.
  • Wen Jiabao was China’s most vocal proponent of reform. He was the unassuming, humble, Grandpa Wen who embodied the traditional, folksy values of an Old China. If his household amassed almost $3 billion in assets since 2002, imagine what others are doing?

The times piece comes out shortly after McGregor’s book –  NO ANCIENT WISDOM, NO FOLLOWERS: The Challenges of Chinese Authoritarian Capitalism, which details the web of wealth, power and institutional influence that define business in modern China.

Implications for International Dealmakers

• This is normal and pervasive. The most significant reaction to reports of Wen’s fortune was the lack of reaction to Wen’s fortune. Even though he was supposed to be “Mr. Clean”, the response to the news that his family has rolled up $2.7 billion in assets was a collective yawn. Beijing blocked the NY Times site as a matter of course, following Bloomberg’s shut down after the XJP story.

• You aren’t supposed to know about it or talk about it. Everyone knows about the wealth being amassed by politically connected families in China – but no one talks about it. Even if your Chinese counterparty brings it up, its’ still not OK for you to talk about it. (Just like it’s perfectly acceptable for you to complain about “those idiots in Congress, the Statehouse, etc.” but it’s not OK for Chinese visitors to say it.)

Many of the transactions described in the article would run afoul of the Foreign Corrupt Practices Act FCPA , potentially. Westerners have to remember that the standards are different for you – both in China and at home. Just because everyone seems to be doing it, expecting it, and waiting for it doesn’t mean it’s OK.

• You’re still supposed to act like you don’t know. Still, this is a big issue in China, so you have to strike a balance. This is where I shake my head and say something middle of the road. “It’s hard to know what to believe, but it’s also hard to know who to trust. That’s why it’s so important to find good partners who can communicate honestly…” Sure it sounds hollow and insincere when you say it – but don’t forget that if your negotiations go well there is going to be money at stake. Once you start splitting the pie, those off-hand comments about corruption or dishonesty are going to be remembered in a completely different light.

Action Plan for International Negotiators in China

  • Do business with someone who has already made the connections. There are plenty of people in China who have already established themselves in the inner circle. The days of westerners stuffing red envelops full of cash are well behind us – or it should at least be considered a specialty move with a high difficulty rating. Paying higher-than-normal fees to someone who is already connected is probably OK – funding your ambitious partner’s entre to the ruling circle is not.
  • The deep end of the pool is really, really deep. Don’t go there if you can’t swim well. Americans tend to drink the guanxi Koolaid – believing that they need to deal with the most connected guy they can find for everything. Unless you are a Wall St bank, giant MNC or an oil company, don’t shoot your mouth off about only wanting to talk to people with connections to the top.
  • You are judged by Western and Chinese laws. Harshly. Talk to a US lawyer or consultant BEFORE YOU GO TO CHINA and know what the rules are and what your limits will be.
  • Arm’s length transactions might be your best option – particularly if China isn’t strategic for you right now. Think about approaching China through Taiwan or Singapore. Pay a little more and let them worry about connections and compliance. HK is no longer arm’s length. It’s now elbow’s length. Maybe wrist’s length. You won’t get your hands dirty right away – but you are still too close for comfort.
  • Avoid “business plan creep”. If you spend time in China you will be offered a deal that are too good to be true by someone who knows a guy. Weigh each deal – hell, each meeting – by its fundamentals. The days of showing up at meetings when you don’t know the people or the agenda are over. If you are a foreigner in China, people are watching. You will be judged by the company you keep.
  • There are fewer and fewer secrets in China.  If major international news outlets can run stories on WJB and XJP , then you shouldn’t count on your tawdry business staying zipped up forever.

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