A new code of conduct Go back »

2009-09-07 | Beijing, Shanghai, Southwest China, Nanjing, Shenyang, Tianjin, South China

A new code of conduct
Lu Haoting, China Daily, 7th September 2009, page 1

The Chinese government's probe into the Rio Tinto commercial spying case may not have a major impact on foreign companies' business investment decisions about China.

But it renews questions about the boundary of multinational companies' acceptable commercial behavior in China, and the cost of crossing that line.

Multinational companies that arrived in China in the early stages of its reform and opening are facing a different China now.

These companies face a stricter regulatory environment, the phasing out of preferential policies toward foreign investors, a rising number of local consumers who fill online chat rooms with comments, and local media that are quick to pick up on foreign firms' blunders.

"Multinationals have to deal with a different sophistication, not only with the government but also the media, customers, suppliers and the Internet," said Jorg Wuttke, president of the European Union Chamber of Commerce in China. The chamber has more than 300 members in the country.

"Stakeholders are getting more informed, more sophisticated and sometimes more aggressive," Wuttke said. "Multinationals have to change their tune."

Uncertainties

Four Shanghai-based employees of Rio Tinto were arrested in early August for allegedly bribing their way into obtaining information about Sino-Australian iron ore price talks. China is the world's largest iron ore importer.

The four employees were detained in early July and were formally accused of the more serious crime of stealing State secrets.

"Some foreign companies are a little worried about the wording on espionage and data information gathering," Wuttke said.

"Many of us in business need a large amount of information that normally comes from publicly available sources to draw rather detailed conclusions after analysis. Some are now worried that if they find such information, will the authorities draw the conclusion they stole or purchased it somewhere," Wuttke said.

Some foreign media reported that the Rio Tinto case elevated the uncertainty factor for foreign investors to do business in China.

But Wuttke said the Rio Tinto case is "a selected singular case" that has no major impact on business investment decisions on China.

"Multinationals certainly do not think about reconsidering China as an investment destination. I have not heard this once. The driver for foreign investment is market size and market access," Wuttke said.

In the early 1980s, China was considered a cheap manufacturing center for foreign companies, and most products were exported to other countries.

But with a double-digit annual economic growth rate and deeper consumer pockets in China, the country has emerged as a strategic market for multinational companies.

While the credit crisis has dragged the global economy into the most severe economic maelstrom of the post-war era, the Chinese economy can still meet its GDP growth target of 8 percent this year and is expected to keep up the momentum next year, Fan Gang, director of the China National Economic Research Institute, recently told the media.

Fan also is a member of the monetary policy committee of the People's Bank of China.

Fan attributed the strong economic growth to the government's 4 trillion yuan stimulus package, domestic consumption, and rising investments in the property and industrial sectors.

The strong growth momentum in China is particularly important to multinational companies battling falling demand in other markets.

The latest European Chamber Business Confidence Survey issued in July showed that 71 percent of chamber members believe China's economy is more resilient than Europe or other traditionally strong markets.

Compared with three decades ago when the country was in desperate need of foreign capital and technology, the Chinese government is now "more sophisticated" in attracting overseas investment, said Victor Ho, partner for mainland and Hong Kong operations at the international law firm Allen & Overy.

"It wants to direct foreign investment into certain areas while creating a more level playing field for Chinese and foreign companies," Ho said.

A good example is a gradual phasing out of preferential policies toward foreign investors.

Previously, tax waivers and incentives allowed foreign companies to pay an average 15 percent income tax versus a 33 percent rate for domestic companies.

Since the beginning of 2008, corporate income tax rates for domestic and foreign companies are 25 percent.

"Multinationals have to be aware that the days when their CEOs came and met top leaders are over. Today, it is more down to business," Wuttke said.

Wuttke's views are shared by Seung Ho Park, president of the SKOLKOVO Institute for Emerging Market Studies, a think tank with offices in Beijing, Moscow and India that focuses on emerging markets.

"In the past it was more like 'top-down' government guidance in foreign investment. But now the government can sit back and let the market take over," Park said.

"If any foreign company wants to come to China, it has to bring the best technologies, because this is a highly competitive market," he said.

"I don't think there is any unexpected change in the business environment for multinationals in China in the last couple of years. They could expect the rule of law is becoming mature in China and the consumer expectation is getting higher. China is becoming mature. This is a common situation multinationals would encounter in any country," Park said.

Media's role

Shortly after the Rio Tinto case was first reported, US label maker Avery Dennison's Asia Pacific Group entered the black list of bribery scandals.

Its subsidiary, Avery China, reportedly had offered bribes to research institutions and government officials in return for business contracts.

Although the scandal took place in China, the case was not investigated by the Chinese government.

However, the scandal experienced wide media coverage in China. The source of their reporting was a litigation file published by the US Securities and Exchange Commission (SEC).

Avery Dennison was compelled under US law to report the case to the SEC and the Justice Department.

"Multinational companies are facing a tough media environment in China. Journalists, especially on the Internet, are quick to pick up any negative news against us," said a foreign business executive in Beijing, who declined to be named.

In recent years negative news reports have mushroomed about product quality, commercial bribery, environmental negligence, unethical advertising and poor labor relations at big-name multinational companies.

"The local media, especially via the Internet, are to some degree responsible for the hype of 'anti-multinational' sentiment," Park said.

"China has the world's largest number of Internet users. They spread information and opinions," Park said.

The situation is not unique to China, Park said, explaining that netizens in other countries also are quick to spread nationalistic sentiments.

But on the other hand, Park said, the media and the Internet have become a monitoring mechanism for consumers and are filling in some of the roles the government should perform.

Park said many foreign companies exploited a lack of rules and regulations in China and did things they would not do in advanced countries such as lowering quality or environmental protection standards.

"China is coming up with excellent rules and laws. Some of the legislation is even tougher than Europe. But the size of the complexity of this economy is rising too fast, and the enforcement of these regulations lacks the right people. That has resulted in inconsistency in the implementation of the laws," said Wuttke of the European Union chamber in China.

"The media should report more independently and help fill that gap," he said.

Wuttke said it is not unusual for multinational companies that "put themselves up there" to attract criticism.

"It is very easy for the government and other stakeholders to benchmark foreign companies so high because they talk green, talk clean and talk how they do internationally," Wuttke said.

"They should make sure they work as they talk, not only in their own operations, but also in their joint ventures and licensees," he said.

Source: http://www.chinadaily.com.cn/bw/2009-09/07/content_8660744.htm