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How we really feel about China, Part I: Guanxi.

By Dan Harris in 'China Law Blog'

Our mission statement (which has been around since January, 2006) makes clear we will not shy away from controversy:

We will be challenging various misconceptions the West has about law in China, including that the law in China does not really matter or that guanxi can supplant it. We will help you figure out how you can use the law as both a shield and a sword. We will give insights to achieve practical solutions, while doing our best to entertain. We know lawyers are not popular, and though we are ourselves really quite likeable, we recognize the need to avoid those things that incite lawyer hatred. We will strive to avoid legal jargon and namby-pamby language that attempts to camouflage our views or to avoid controversy.

We want our blog to be a place for both conversation and controversy. We expect many of you will disagree with us much of the time and we are fine with that. We will always strive to avoid boring you or being unwilling to take a stand. We are not going to be afraid of being wrong—in fact, we want you to tell us when and how we are wrong. If you want "legalese" or long strings of caveats, you are going to have to pay exorbitant legal fees to get that elsewhere.

We have taken many strong positions over the years, but in some cases those positions have been at least somewhat misunderstood and this new (and irregular) series will aim to clean up misconceptions, starting with our position on Guanxi, on which we have done the following posts:

Our position is essentially that for the overwhelming majority of foreign companies doing business in China, guanxi is no substitute for needing to scrupulously abide by China's laws.

A few years ago, co-blogger Steve Dickinson, wrote an article for China Business International, entitled, Debunking the Guanxi Myth, setting out the following reasons why relying on guanxi will almost invariably be a mistake for foreign businesses in or involved with China:

No foreigner can recreate a Chinese-style guanxi network. In China, guanxi refers to a vast network of connections arising from party, family and work connections that may go back several generations. No guanxi network relies on a single individual. The elimination of one member of the network is therefore not fatal. Foreigners almost always rely on only one or two individuals for their supposed connection. This kind of network is too fragile to be of enduring value. Foreign investors who think they have created a guanxi network in China are usually simply deluding themselves.

Connections with local government officials are short-term and can be abruptly terminated. Many foreign investors do not realize that government officials in China are regularly moved from office to office and from region to region. As a result, the connection with a local official is unlikely to be a long-term connection. It is quite common to negotiate a project for several years and then learn that the official in charge has been transferred to a new post. Where the project is not in compliance with the law, their replacements will often refuse to sign the documents that have already been negotiated.

The Chinese provider of guanxi may suddenly disappear. If the project depends on the protection of a single individual, what will happen if that person dies, is demoted, or prosecuted for corruption? This change in fortune can be a particular disaster where the foreign investor has already contributed funds, because the project can be cancelled with no refund on the investment.

A project based on guanxi gives too much power to the Chinese side of the deal. In many cases, the provider of guanxi will make use of the fact that the project is not in compliance with the law to ask for additional benefits. Since the foreign side has no legal recourse, the foreign side must accede to what is in effect a blackmail request or risk the collapse of the project. When the foreign investor comes to a lawyer for help, there is nothing that can be done, since the project itself is either illegal or poorly documented.

So what is the misconception? Well the other day I received an email that started out saying "I know you do not believe in Guanxi." This is not correct. We do believe in Guanxi, it just depends on how Guanxi is defined and about whom we are talking. Frankly, it would be downright silly to dispute the existence of Guanxi and we have never done that. For example, in Steve's China Business International article, he makes clear Guanxi has its place:

I do not mean to say that having good guanxi is of no value in China. It is of course beneficial in China, as in any country, to cultivate good government relations. Connections with the wealthy and powerful are also an advantage when working in a difficult investment environment.

However, these kinds of connections should never be seen as a replacement for carefully structured investment projects. All investments should be designed to comply with mandatory laws and regulations. The investment must be documented so that the foreign investor can defend its interests in the event of a dispute or changing conditions. Failure to follow this careful approach is the source of many self-inflicted foreign investment disasters that we see all too often in China.

Today, John Garnaut of the Sydney Morning Herald has out an amazing article, entitled, "Macquarie's getting well connected in China, describing in great detail how guanxi is playing a crucial role in investment bank hiring and business. This is real guanxi and it clearly does matter for the investment banking business.

Richard Burger (of Peking Duck fame) has a new, more business oriented blog, entitled, Good Guanxi: A Blog About China and Communications." In his first post, Richard explained/justified his using Guanxi in his blog name:

I'm sure some of my friends in China will be scratching their heads wondering why I named this blog "Good Guanxi."

Expats in China believe fairly monolithically that the term guanxi is overused, and that the importance of guanxi is over-rated. Every amateur trying to impress others with their knowledge of China rattles on and on about guanxi, so yes, in this sense it is overused. The fact remains, however, that there is no way you can do business in China without understanding what guanxi is and what you need to do to win it and sustain it.

Burger then talks about the importance of "building good guanxi":

I would counter, however, that as soon as you arrive, building good guanxi is important; it has to start somewhere, and you have to keep the development of good guanxi a goal whenever you deal with Chinese business partners, officials, and, of course, the domestic media. Now, that applies to your business relationships in any country, not just China, of course. But I can cite from personal experience the fabulous results a good PR person with good guanxi with Chinese reporters can accomplish. And, as I say in the video, I know how guanxi can open doors for companies in China, in a way it can’t in many other countries.

He then quotes me from a recent interview I gave for Beijinger Magazine

China Law Blog, which may be the single best resource for companies venturing into China, recently decried the whole notion of guanxi, and when asked how big a role guanxi plays in doing business there replied:

Shockingly little. I have met many people who have real power in China but virtually none of them really do rely on their relationships with people to take care of business. Our lead China lawyer, Steve Dickinson, has been living in China and doing business there about half his life. His spoken and written Mandarin are better than your average educated Chinese person. Steve knows a ton of people in China, yet he would never claim to have pull there nor would he ever advocate taking a shortcut because of pull. I cannot tell you how many times I have heard of or seen a Western company believe it did not need to follow the rules because it had sufficient pull to get away with doing things outside of the lines, only to face major issues for having operated outside of the law. The problem with guanxi is that there is always going to be someone higher up than your contact and that person higher up may at some point call you to account for your failure to follow the laws to the letter.

Richard also quotes from a Chinese Negotiation post by Andrew Hupert on the proper role of guanxi in China:

As a skeleton key that will magically unlock doors, it is problematic. Yes, guanxi can open doors, but there are three problems: 1 — it won't necessarily open the door you need unlocked. 2 — When all you have is a key, all problems look like locked doors. You may end up rewriting your business plan because your guanxi connection leads you to a single type of resource or decision maker. And 3 — that door may lock behind you. Westerners who encounter problems in China are rarely suffering losses at the hands of complete strangers. The people gutting you of your investment, assets and IP are the very same ones who lured you in with promises of powerful connections and influential friends.

In short, guanxi can play a role in your Chinese negotiating, but you will have to monitor and decide what that role will be. Guanxi networks are great as information and networking resources. However, if you plan on using connections to open doors — or knock down walls — then you are going to encounter some major difficulties down the line. When you use guanxi as a shortcut in China commerce, the destination is usually business failure.

As much as I would love to generate controversy over this issue, I fear there is really done. I will go out on a limb here (with the full expectation and hope that Richard and Andrew will correct me if I am wrong) and state that all three of us can probably agree on the following points regarding Guanxi:

  1. It takes time to cultivate.
  2. It is not a substitute for good business sense.
  3. It does not make a bad business deal a good one.
  4. It should not be used as a way to skirt the law.
  5. It makes sense to have good relationships with people in China, just as it makes sense to have good relationships with people everywhere.
  6. Guanxi does sometimes make things go more smoothly.
  7. None of us have any real clue as to whether guanxi should or should not be capitalized when written in English.
  8. Most who claim to have serious guanxi do not.
  9. An even greater percentage of foreigners who claim to have serious guanxi do not.
  10. The value of guanxi varies from industry to industry. For instance, I understand that guanxi is critical to the media business in China and to securing government contracts; it is of virtually no importance in getting your trademark or WFOE registered in China.

I conclude with some pithy quotes and a link regarding guanxi:

Richard Burger: "Guanxi, despite the term being cliched and over-used, is for real and it does matter — within limits. Know what it is, and cultivate it as much as you can."

Me: "Bottom Line: Be very skeptical of a China service provider who spends time talking about his or her China connections. Those who tout their connections/guanxi are almost always doing so because they have so little to say about their expertise and experience."

Richard Brubaker, of All Roads Lead to China: "Guanxi either retires or goes to jail."

For those interested in reading more on this, I urge you to check out Hupert's recent post, "Americans Negotiating in China: Guanxi Relationships and Foreigners Part II – 10 Caveats."

Lastly, I will note that I have set up a discussion on Guanxi on the Linkedin China Law Blog Group, where I ask "What exactly is guanxi?" and "How does it help foreigners doing business in or with China?"


Dan Harris is founder of the Harris & Moure law firm, a boutique international law firm focusing on small and medium sized businesses that operate internationally. China is the fastest growing area for the firm. Dan writes as a source of China legal and business information.

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