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Few executives with experience in the PRC would dispute that China is one of the most difficult countries in the world in which to do business. The unbounded optimism of the early Open Door years has given way to a steely realization of the many seemingly intractable risks and problems confronting foreign business in China. Were it not for the tantalizing potential of this vast country, it is certain that far fewer companies would be waiting for smoother sailing.

The risks of waiting for conditions in China to improve have evolved from macro-level dangers to micro-level problems. For several years after the 1989 suppression of pro-democracy demonstrations, foreign investors understandably focused on classic political risk factors by examining the structure of the Chinese state and looking for signs of another student rebellion--and wondering whether it would topple the Chinese Communist Party (CCP). Companies drew up evacuation plans. Some risk managers--perhaps under the influence of sensationalist journalism--have continued to emphasize large-scale political risk in China. For example, some questioned whether President Jiang Zemin or the Party could survive the death of Deng Xiaoping, and formulated contingency plans in case Deng's death prompted a military coup, regional brea kaways, or some other destabilizing event.

But a more sober analysis based on micro-level risks is starting to prevail. The trend in China risk analysis seems to be toward examining problems stemming from crime, corruption, bureaucratic interference, and an underdeveloped business environment rather than monitoring developments within Zhongnanhai, the residential compound of PRC leaders. For risk analysts, focusing on the socioeconomic effects of CCP policy tends to be more important than studying the politics that created them.

Personal security

But certain foreigners are more vulnerable than others, it seems. Overseas Chinese executives are more likely to be assaulted and robbed than members of other ethnic groups and, indeed, constitute the majority of foreign victims of crime in China in recent years. Various theories on this trend have been advanced, though none can be regarded as definitive. Criminals may perceive that police are less thorough in investigating cases that involve ethnic Chinese rather than non-Asian victims. To the extent that cases of violent crimes against non-Asian foreigners elicit more international attention, the police seem to be under greater pressure to involve the embassies and the Ministry of Public Security in their investigations. Such cases also tend to give Chinese authorities an international showcase for their efforts to crack down on violent crime. Whatever the cause, crime against ethnic Chinese executives is a major concern for Western companies, many of which are staffing PRC offices with a growing portion of ethnic Chinese.

Perhaps the most worrisome development for executives is that most crimes committed against foreigners in recent years have occurred in upscale, three-, four-, and five-star hotels. Criminals evidently have come to recognize guests of s uch hotels as potentially lucrative targets. Since 1995, a handful of mostly ethnic Chinese executives of major US and European corporations have been murdered in international-standard, five-star hotels in Beijing; Fuzhou, Fujian Province; Guangzhou and Shenzhen, Guangdong Province; and Guixi, Jiangxi Province. Alarmingly, the executive murdered in Guixi was actually a guest of, and was to conclude a financing deal with, the company that owned the hotel.

Not surprisingly, most crimes against foreigners in China are robberies. But the motives for violent crimes against foreigners are unclear. In part, this is because police are rarely willing to discuss individual incidents, throwing a cloak of secrecy over cases under investigation. Often the victim's company is kept in the dark during an investigation. Some cases conclude with a terse announcement in the local or national media that the culprit was arrested, tried, and sentenced. In many cases, the State identifies the offenders only as "migrant laborers."

To safeguard themselves from assault and robbery, foreigners should take several precautions that seem obvious but are often overlooked. For example, when staying in a hotel, it is wise to open the room door only to prearranged visitors and to ask the hotel operator to put through calls only from people who can cite one's name. Securing a room on the hotel's more expensive "executive floor," where security tends to be tighter, is also a good idea. In general, concealing or leaving at home watches, jewelry, and other expensive items is a sensible precaution.

Conflicts with the State

Foreign companies often choose ethnic Chinese executives, because of their linguistic abilities and cultural sensitivities, to make contacts and obtain potentially sensitive information--about government policy and operations, for example. Such activities put these executives in a vulnerable position, as they must be careful not to trespass into areas guarded by the Chinese State. Even if foreign companies meticulously supervise the acti vities of their Chinese staff, the vagaries of PRC law mean that such caution is no guarantee against conflict with the State. Moreover, PRC authorities are unlikely to oblige a foreign company's demands for a hard and fast list of rules on information gathering.

At least two major Western companies have discovered the risks of information gathering in China. In 1996, an ethnic Chinese employee of a multinational oil company was imprisoned for allegedly acquiring State secrets in connection with the company's project. The employee had been tasked merely with finding out what stage the project had reached in the approval process and how the process could be accelerated, but certain officials apparently believed that the employee had probed too far. In a similar case that year, an overseas-Chinese employee of a European investment bank was arrested and detained for having allegedly disseminated information from a People's Bank of China report intended for "internal circulation." Such a label, however, is not uncommon on documents and journals that are available to the public. It appears that PRC authorities moved on this particular case after the central bank was angered by the company's report on PRC currency matters.

In few other countries is there such a thin line between commercial research and alleged criminal activity. The PRC government draws a sharp ideological distinction between national interest and the ambiti ons of foreign companies. It is often a zero-sum game, with the authorities tending to perceive direct conflict between the national interest and the ambitions of foreign companies on this issue. Unfortunately, the prospects for greater transparency in this domain are slim. While PRC authorities recognize the need for clearly defined laws governing normal commercial activity, they are unlikely to acknowledge the need for transparency in any area in which they perceive the interests of the State to be at risk.

Business disputes

China's lax law enforcement is especially troubling for entrepreneurs and smaller companies, particularly if they are operating in remote parts of China where local officials' po wer may go unchecked. For instance, in 1995 a small biochemical firm owned by an American businessman allegedly owed roughly $500,000 to an Anhui company. When the American company president arrived in Hefei, Anhui Province, to settle the dispute, he was physically prevented from leaving his hotel by executives and shareholders of the Anhui corporation. Neither the police nor the hotel staff intervened, and an Anhui People's Intermediate Court judge confiscated his passport before any investigation had begun. The US consulate in Shanghai intervened, and a judge subsequently ordered both sides to negotiate, resulting in the executive's release.

A more widely publicized case was the 1993 abduction by PRC police of James Peng, the Australian-Chinese partner of Champaign Industrial Ltd., a Shenzhen-based manufacturing joint venture. After years of escalating financial disputes with his PRC partners and local officials, Peng was taken by PRC police from his Macao hotel room to the Chinese mainland. Peng spent 2 years in prison before a Shenzhen court finally found him guilty of misappropriating funds from Champaign Industrial and sentenced him to 16 more years of imprisonment and deportation. Australian and American officials continue to negotiate for Peng's permanent release.

Large multinational corporations wield much greater leverage in disputes with Chinese firms and, consequently, are less likely to suffer such abuse s. Such corporations tend to be able to take their grievances to a higher government level to help resolve cases than small entrepreneurial companies. Even for sizable corporations, though, a Chinese partner's connections or hidden agenda can wreak havoc with the most carefully formulated business plan.

Painstaking due diligence is the only effective precaution. Many foreign companies, in their haste to crack the China market, enter unsuitable marriages with Chinese partners, which can end in costly and bitter divorce. Thorough investigation of the Chinese company's solvency, ownership, track record, and key personnel should be a part of any international business courtship. But in China, this investigation should include not only conventional numerical and legal checks carried out by accountants and lawyers, but also verification of the Chinese partner's political connections, and how, if at all, these connections could be nullified in the event of a serious dispute.

Fees--and more fees

Is the reality as bad as the perception? Should corruption deter foreign companies from doing business in China? Answering these questions requires a redefinition of corruption. To read China's official media is to learn of the country's 5-year anti-corruption campaign, in which 670,000 CCP members have been disciplined, and more than 120,000 people expelled from the Party, including former Beijing Party chief Chen Xitong. China has also recently executed some officials found guilty of bribery. China's attractiveness to foreign investors fades in such a light. Nor does President Jiang's assertion that corruption threatens "the very existence of the Party and State" inspire confidence.

But the form of corruption that is most rampant in the PRC is simple embezzlement--local officials siphoning off public funds into private accounts. Such activities bypass foreign companies completely. Likewise, stories of foreign companies being asked for bribes are altogether rare. A bribe culture could not realistically survive in China's present anti-corruption climate. As the crudest form of corruption, bribery is an easy target for the draconian anti-corruption crackdown. Meanwhile, many Western corporations are bound by corporate codes of conduct and, in the case of US companies, the Foreign Corrupt Practices Act (see p.26).

Knowing exactly what constitutes bribery in the PRC is, nonetheless, a further safeguard when doing business there. According to the 1988 Supplementary Provisions of the PRC Criminal Law, bribery is the "giving of property, sales commissions or service fees to State personnel in order to obtain improper benefits." Thus, unauth orized special commissions and voluntary contributions in economic transactions may be considered bribes. While those convicted of soliciting or accepting bribes face maximum sentences of life imprisonment or death, those convicted of giving bribes face a maximum of three years imprisonment or criminal detention.

But questionable demands on foreign companies in China are made. Dubious "fees" levied on top of required taxes are one of the most prevalent forms of abuse inflicted on foreign companies. For instance, each of McDonald's Corp.'s 38 restaurants in Beijing is reportedly subject to 31 miscellaneous fees, of which only 2 are clearly spelled out in the legal code, according to the China Economic Times. If such bureaucratic devastation is being wrought with impunity on such a high-profile multinational company in the capital city, it is safe to assume that smaller foreign companies in other parts of China confront similar circumstances. This is a problem of which the central government is acutely aware and claims to be addressing. The central government reports that it has forced 21 provinces and cities to cancel more than 2,800 fees in 1997, and has attempted to simplify taxes and limit local interference with foreign companies. But the central government's inability to supervise every local government makes the prospect of short-term, large-scale improvement of the situation unrealistic.

Moreover, whether such fe es are a manifestation of corruption is a matter of debate. China's official media considers such fees simply the result of government agencies being forced to raise their own revenue in the face of dwindling funds from Beijing. Yet the fact remains that many of these fees have no legal basis and are often negotiable. Consequently, auditors in US and European head offices have every right to be confused and skeptical. Unfortunately, there is little recourse available to a foreign firm, as PRC authorities tend not to address company-specific grievances. But if a foreign company's grievances are serious enough to potentially tarnish China's commercial reputation, the foreign firm may choose to bring the situation to international attention to elicit action from central authorities.

Attempting a clean sweep

How conditions for foreign investors will improve in the short term is difficult to predict. The central government's considerable efforts to make the commercial environment more transparent are undermined by the country's decentralization, which gives local officials greater power. In the long term, the destabilizing effects of State-sector reform may distract the Party from its efforts to eradicate corruption and fine-tune the business environment to the satisfaction of foreign investors.

But there is little question that Beijing is sincere in its attempts to clean up the business environment. For example, the appointment to the Politburo Standing Committee of Wei Jianxing, head of the CCP's Discipline Inspection Commission, who has frequently been referred to in the Western media as a graft buster, sends a powerful message of this intent. What remains uncertain is Beijing's ability to follow up on its brave words with effective deeds. Foreign companies will not be impressed with long lists of statistics on disciplinary actions until they detect changes at the grassroots level, particularly the easing of bureaucratic opportunism and intransigence. The focus of business risk in China will continue to change, but the difficulties confronting foreign companies may not diminish. That so many foreign companies continue to do business in China, however, suggests that the problems of China's business environment are not insuperable.

Jake Stratton is a London-based Asia-Pacific analyst with Control Risks Group, Ltd. (www.crg.com).