By the Blouin News Business staff

Straying into the grey areas of doing business in China

by in Asia-Pacific.

JP Morgan sign is pictured at its Beijing office.

Photo Credit: Reuters/Jason Lee

Business as usual in China has become a risky undertaking. Not only are Chinese authorities probing the business practices of Western multinationals in a range of industries from pharmaceuticals to autos, but U.S. authorities are now doing the same to the Middle-Kingdom activities of at least one New York bank.

JPMorgan is being investigated over hiring the children of well-connected top Chinese officials, purportedly to help it win banking business in the country. GlaxoSmithKline and several other foreign drugmakers stand accused of making payments to Chinese doctors purportedly to prescribe their medicines. The commonality is that both practices were taken to be commonplace in a country where cultivating political connections is part and parcel of doing business (China’s not alone there). What has changed is that the accepted dividing line between facilitating commerce and outright bribery has shifted.

It has been happening more subtly in the U.S., which may be why the high-profile JPMorgan case has suddenly sent such a chill through Wall St. It is not a contravention of the U.S. Foreign Corrupt Practices Act (FCPA) for a U.S. company to hire politically connected executives — indeed, domestically the revolving door between Wall Street and Washington never stops turning — but hiring a person to win a specific piece of business could be construed as bribery under the act.

Legally, it is a grey area and one that has not troubled U.S. authorities sufficiently in the past to deter the world’s top investment banks from making such hires. Yet U.S. authorities have been increasingly prosecuting multinationals under the FCPA. They have initiated 90 such investigations over the past decade, after barely using the act in the previous 20 years of its existence. A third of those prosecutions have involved U.S. multinationals’  activities in China — though not typically hitherto companies with the lobbying power in Washington that Wall Street firms can deploy

The hiring of their sons and daughters by top global investment banks has not seemingly troubled senior Chinese officials. The rite of passage from elite U.S. university and business school to a white-shoe firm seems as natural a progression to Chinese as it does to Americans. One nation’s guanxi is another’s alumni network. While China has launched a number of wide-ranging investigations into business practices, primarily but not exclusively of foreign firms, there is a clear political and policy agenda behind it.

The agenda items are varied and complex. Some investigations are doubtless intended to reign in foreign firms to the advantage of domestic competitors, and in cases where product safety is involved, to underline a point that foreign doesn’t always equal safer. The price-manipulation probes are also part of a broader campaign against inflation. Milk suppliers have lowered prices as a result. Carmakers are next in line for the treatment.

The investigations also all fall under the broad umbrella of the latest political drive against corruption. That a mix of foreign and local companies are being punished in this respect is significant, even if foreign firms are bearing the brunt. Targeting foreign companies for an abuse is a time-honored way for Chinese authorities to send a message to domestic firms that it is equally unacceptable from them.

If the new leadership’s anti-corruption campaign is to be any different from the many that have ineffectually preceded it, reining in corruption within the Party and the government will also require breaking their symbiotic relationship with business. That companies, if sufficiently well-connected and hospitable, can be above the law, too, is deeply embedded in Chinese business culture. Because of that western multinationals often given their China divisions more leeway and less oversight than they do other parts of their business. By GlaxoSmithKline’s own admission, that certainly seems to have happened in its case.

In this new business climate, foreign multinationals will need to ensure that their China businesses (and staff) are compliant with both Chinese and their domestic anti-corruption laws, and be aware that their vulnerability to repetitional damage is likely be used against them both in China and at home if they stray too far into the grey areas of doing business in China. (They should also read this post on the China Law Blog, “Bribery in China. Is it worth it?“)

In the longer-term, those grey areas will have to shrink: China has to reach higher standards of corporate governance as it develops its economy in the more market-oriented direction in which its new leaders say they want it to go.