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VIEWPOINT: Think you can move fast? Look at China

September 29, 2008

This month, I am making my 50th trip to China. My first trip was in 1995 to identify a possible Chinese partner for a manufacturing joint venture in Nantong. When the potential partner honored me by serving a coiled snake as one of the main dishes, I thought, "What am I doing here?" But that's what change is all about-delving into the unfamiliar.

Four years later, we had found a trusted partner, signed a joint venture agreement, located the proper site, and had begun construction on a $30 million chemical plant. Two years later, the plant was built and it has run successfully ever since.

As I contemplate what has changed since that initial trip, some things are obvious. In 1995, there were a lot more bicycles-nearly everyone rode a bicycle to work, to shop, to take the children to school, and to move household goods about. I once saw a man and woman on a bicycle with a queensize mattress and box springs!

Today, cars and trucks outnumber bicycles in major cities. Gone are the bicycle repairmen on each street corner who would fix your flat tire or bent wheel rim. There are more high-rise businesses, super highways and new airports. The construction in Beijing just before the Olympics has been a marvel to witness.

The less visible changes have more impact on how we, as foreigners, do business in China, and are equally striking. No longer do you have to have a Chinese partner when setting up a company in China-wholly foreign-owned enterprises are common (although you still might want a Chinese partner if you can find one with a good distribution system, or good connections to the government). Reforms to the banking system have made foreign exchange easier, although you will still need government permission to open a bank account, and, more important, to transfer dividends or profits out of the country.

China has moved forward in giant steps in creating a legal system and has passed new laws related to labor, property, monopolies and intellectual property. The real pitfall nowadays is in understanding where there are major gaps between what the law says and how the government agencies are interpreting or applying those laws in the absence of detailed regulation. The real opportunities and, unfortunately, the serious risks are in those areas of uncertainty.

For instance, China recently abandoned tax holidays as an investment incentive. The new tax law said businesses established before a specific date would still qualify for a tax holiday, but those established after that date would not. As tax holidays were often given for as long as five years, the economic benefit of a tax holiday was substantial. But how do you judge whether a business is "estab lished"? Is having your business license sufficient? Or do you need to have the business license registered with the relevant government agency?

The economic changes are mind-boggling. Unlike many other developing countries, China is developing a middle class, with impressive buying power. The appetite for luxury goods by upper-class entrepreneurs is truly astonishing. On a recent trip to Beijing, I counted 20 Maybach Mercedes Benzes parked at one hotel. I have never seen even one of these high-end cars on the streets of Indianapolis!

In 1995, I did not foresee the opening of China to trade and business to the extent it exists today. At that time, many businesses were still concerned that China's government would privatize foreign-invested factories or would curtail the growth of a market-driven economy. Today's China could be the model for change-how to change an economy and business environment in just one generation. It is a marvel to see, but it is still a maze to navigate.



Simmons leads the international practice at the local law firm of Baker & Daniels.
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