China is a country like no other: it is the world’s leading exporter; the largest oil consumer after the US; and the world's biggest producer and consumer of coal. With an enormouspopulation of 1,387,506,866(Worldometers, 05.17.2017), it’s little wonder China is the fastest growing economy in the world, attracting huge amounts of foreign investment.
Foreign investors,however, may find it daunting and difficult to manoeuvre within the economy. Outsiderswho want to do business in China must take the time to form relationships or “guanxi” (pronounced gwan-shee).The concept of guanxi in Chinese business is an important one; it refers to the social and business relationship network that facilitates trade, and it can be key to a successful business venture since goods, services, or personal favours can be exchanged for anything of value and benefit to the relationship. Therefore, guanxi must be maintained by new foreign businesses to ensure appropriate positioning for future ventures in China.
The Chinese economy is a unique and interesting story. Due to China’s economic reform, the country’s landscape has changed drastically and continues to change. What’s more,China’s reforms on corruption,mass urbanisation, and an ageing population– along with a newer generation of Chinese becoming more educated – means the concept of guanxi is evolving. It is becoming more sophisticated as time passes with an increasing emphasis on business outcomes, more so than political ones.
As guanxi is evolving, foreign investors should be prepared to exchange favours with their Chinese business partners to demonstrate their sincerity. What’s more, they shouldacknowledge government guanxi as a way to source competitive advantage within the laws and regulations in China. China’s new reform will make it easier for the poor and the middle class, as well as the rich, to afford the same opportunities as the rest, to move beyond their difficult economic situation, and to educate themselves about the opportunities also provided by the Chinese government’s urbanisation incentives. In 2012, people who lived in cities outnumbered those who lived in rural areas (BBC, 21.01.2016).
Fundamentally, guanxi is about building a network of mutually beneficial relationships which can be used for personal and business purposes (Goh, A. and Sullivan, M., 24.02.2011). Guanxi can be linked to the unique Chinese culture and to the legacy of Confucian morality within that culture (Kurkchiyan, M., 28.06.2007). Guanxi plays a different role in the east to how it does in the west where deals are brokered through formal business meetings. In China, it is necessary to get to know your Chinese counterparts by spending time with them during tea sessions and dinner feastswhich are never outsourced to a third party (Hoffmann, W. J., March 2013).
In China, the rule of man is considered more important than the rule of law. When the law does not rule the land, guanxi networks are relied on as a mechanism for organisational governance. This occurs when legal and institutional mechanisms fail to determine outcomes in a reliable manner (Hoffmann, W. J., March 2013).Guanxi is, therefore, the alternative solution(Tucker, M., Oct. 2009), building trust which the law cannot always provide people in personal and business matters(Goh, A. and Sullivan, M., 24.02.2011). PresidentXi Jinping's “Rule of law”means the law is above everything else in the country with an independent judiciary (Hoffmann, W. J., March 2013), which is captured in the party’snew slogan,‘Socialist rule of law with Chinese characteristics’ (The Economist, 01.11.2014).
Guanxiis a powerful force in China, and in the Chinese system of relationships, ‘guanxi’ literally means a “relationship” or a “connection”:‘guan’ means gate and ‘xi’ means connection, whereby one must pass the gate to get connected. It is used as a cultural strategy in mobilising social resources for goal attainment (King, 1991). The term guanxi refers to the concept of gaining connections to secure favours in relationships. Guanxi is an action taken; it encompasses the use of personal connections deliberately for a specific purpose such as political or economic benefits (Fan, 2002).
In the west, business practices are more linear and follow the rule of law, whereas in China, companies have a non-linear approach to business. Because of their business practices, the Chinese Communist Party has become massive, exerting an unpredictable influence on all aspects of business society (Hoffmann, W. J., March 2013). From the perspective of business practices, guanxi can be defined as the process of finding business solutions through personal connections (Fan, Y., 2002). Guanxi in China is widely recognised as a key business strategy for a successful venture in Chinese society. In contrast to the west’s transaction-based business context, Chinese business society is relationship-based (Ai, 2006; Chen, 2001). Guanxi is classified into two categories: (1) B2B guanxi, where both parties are business persons, such as supplier-customer relationship; (2) B2G guanxi, where one party is a business person and the other a government official (Fan, Y., 2002; Park, S.H. & Luo, Y., 2001). There are also three components to guanxi: trust, relationship commitment, and communication.However, multinational companies (MNCs) in China are primarily motivated by profit (Hoffmann, W. J., March 2013).
Guanxi is a source which companies can utilise when they need to find assistance in China. A popular saying in China is, “China is a land of guanxi…Nothing can be done without guanxi” (Tsang, 1998). Guanxi creates growth and is a powerful asset which can be used to create great wealth and strong business relationships;it can even be viewed as a type of social capital.Once a relationship exists, it must be ritually cultivated in order to achieve guanxi. Guanxi may be based implicitly on mutual interest or need, or guanxi may be based on a common objective or goal (Tucker, M., October 2009).
China has transformed from an investment-driven country to a consumption-driven country. It is an emerging economy and its economy is in transition (Gang, F., 22.08.2005) to become much more. China's economy produced $21.27trillion in 2016, while the European Union came in second with $19.1 trillion and the United States fell to third, producing $18.5 trillion (Amadeo, K., 04.17.2017). While governmental guanxi benefits the legal and regulative aspect of the business, the private guanxi network is highly efficient in dealing with market competition (The Author Journal Compilation, 2006).
Part of China’s economic success is that it has benefited greatly from being a member of the World Trade Organisation, so much so in fact that the renminbi’s value increased, which would make Chinese goods more expensive for foreign investors and could have a negative impact on exports (BBC, 21.01.2016). Guanxi can be very helpful when dealing with the Chinese government, providing a solution to the cumbersome Chinese bureaucracy by giving firms a way to circumvent rules through the activation of personal relations (Luo, 1997, 2000).
Another major factor for China’s success was the introduction of global direct investment.This resulted in rapid economic growth which made China the fastest growing economy for the last 20 years, expanding at 10% annually and per capita income more than tripling (Zhang, L., September 2016).China reached $17.6 trillion or 16.48% of the world’s purchasing-power-adjusted GDP in 2014, while the United States made less at 16.28% or $17.4 trillion (R.T., 10.10.2014).However, in terms of real GDP, the United States remains the undisputed world leader with $16.8 trillion output, leading China with $10.4 trillion (R.T., 10.10.2014).
The successful implementation of China’s economic reform policies resulted in major changes in Chinese society. Geoff Riley (2017) lists four major aspects of China’s rebalancing, including (Riley G., 06.02.2017) (1) Internal: shifting from investment to consumption, from industry to services, and improving resource efficiency; (2) External: becoming less reliant on external demand, on shoring up production of higher value products; (3) Environmental: reducing the energy and carbon emission outputs and addressing severe local pollution issues; (4) Distributional: creating a more equal society by increasing the share of labour income in GDP and reducing income inequality.
These changes did not come without a cost.Due to a rapid economic increase over the years, China has created high inequality, rapid urbanisation, challenges to environmental sustainability, and external imbalances(World Bank Group, 28.03.2017). In some eastern coastal provinces, urbanisation has reached 70%, and according to Economic Daily, the percentage of workers under 40 will further decrease. This is a clear warning for China’s labour-intensive manufacturing industries to quickly modernise their technologies (Danning, M., 30.04.2015).
Economic reform has replaced state socialism and produced rapid growth, transforming China’s economy into one of the world’s largest. Yet China still has problems, such as rural poverty, inequality and environmental degradation,and the country is known for having the mostpolluted cities and an inefficient state sector (BBC, 21.01.2016), as well as low domestic consumption. In the past, the state would discriminate between China’s locals and rural migrants, but the government’s reforms of the hukou system have extended urban welfare services to migrant workers and raised the minimum wage (Cohen, N., 05.05.2013). This has released the ties of guanxi, allowing more opportunities for families to lift themselves out of poverty, move to bigger cities, educate themselves, and lead better lives. With advantageous reforms and a more level playing field, families can depend on the rule of the law and not guanxi to improve the quality of their lives. In 2013,China had more than 41 million migrant workersaged over 50 years old, accounting for 15.2% of the total (Danning, M., 30.04.2015). China went from an infrastructure- and investment-driven economy to a consumption and services-driven one which threatened to upend economies that depended on domestic Chinese infrastructure spending and investment.This caused problems for countries depending on domestic Chinese infrastructure spending and investment(World EconomicForum, 02.10.2016). China invested globally at 50% of their national income and accumulated debts at an annual rate of more than 15% of GDP (Peston, R., 24.10.2015).
In 2013, the Transparency International’s Corruption Perceptions Index (known as ‘the Index’), which ranks countries based on the perception of corruption in their public sector, ranked China at 40 out of 175 countries surveyed (Gorman, T., 25.08.2014).
President Xi Jinping’s anti-corruption campaign is an attempt to legitimise the authority of the Communist Party with his famous proclamation that the Central Commission for Discipline Inspection (CCDI) would be “striking tigers and flies at the same time” (South China Morning Post., 03.11.2014).The campaign has already had an impact on politicians whereby they are far less willing to show off their ill-gotten gains as a result of guanxi.
Consequently, the anti-corruption campaign has affected the cost of guanxi, as businesspeople complain that bribery costs have risen, risks are greater, and payments are being paid in foreign currency into offshore bank accounts (Anderlini, J., 04.01.2017). The direct rise in the cost of guanxi has resulted in far more conspicuous and riskier activities taking place, a new innovative corruption if you will, meaning guanxi is adapting with the times. Guanxi is not the only solution for success in China, however, and guanxi networks depend on a fit with the institutional environment and the enterprise’s attributes (Park, S.H. & Luo, Y., 2001).
According to the Communist Party of China's anti-corruption bodies, there were over 660,000 officials punished for disciplinary violations since the 17th CPC National Congress held in 2007 (CNTV, 11.14.2012). Corruption continues to negatively influence business in China and companies are likely to experience bribery(GAN Integrity, November2016).
Bribery and guanxi can be confused and should not be misconstrued.Bo Zhiyue is a veteran commentator on Chinese politics at the National University of Singapore and he states that “Nobody is sleeping well now. There is a lot of uncertainty and there are no clear rules as to who gets investigated” (South China Morning Post, 03.11.2014). This ambiguity can cause businessmen to be reluctant or scared to conduct business and accept guanxi or to provide guanxi without the risk of being investigated for corruption.
Corruption in China affects every level in society,and companies are likely to experience bribery, political interference or facilitation paymentswhen acquiring public services and dealing with the judicial system (GAN Integrity, November2016).Tens of thousands of people travel to Beijing annually to petition authorities to redress alleged corruption, land seizures and evictions (BBC, 21.01.2016).Property rights, legitimate business practices and other basic elements of market economics remain poorlydefined (Johnston, M., July 23).
In China, loyalty to family and clan has always overridden loyalty to the state, and this is part of China’s problem when it comes to corruption.Breaking the law is small compared to breaking guanxi. Although China has transformed itself in many areas and has come a long way,itstill remains a developing country and its market reforms are still incomplete and require a lot of work to be done.According to China’s current poverty standard, 55 million poor people lived in rural areas in 2015 (World Bank Group, 28.03.2017).The International Monetary Fund (IMF) found that Beijing had the biggest global economic risks to be addressed by the world’s leading economic policy-makers in 2015 (World Economic Forum, 02.10.2016). Between 1978 and 2012, the average growth rate of real GDP was 9.4% (Hirst T., 30.07.2015), and Hirst goes on to say that that figure could decline to 7-8% respectively between 2012 and 2024. China'seconomic growthrate slowedto 6.6%in 2016, the lowest since 2009, and 6.9% in March 2017 (National Bureau of Statistics of China, 04.17.2017).
China is rebalancing the economy and focusing on the quality of growth while still trying to achieve a prosperous society by 2020.China's 13thFive-Year Plan’s growth target is 6.5%, which was the slowest growth in 26 years (National Bureau of Statistics of China, 04.17.2017). China is changing: it is modernising its industries, reforming its laws and economy more, and facilitating better higher education for its citizens. Therefore,it is possible the need for favours might disappear when people can depend more on their skills and qualifications than guanxi. With the institutional transition of reform, foreign investors who want to conduct business in China should begin setting up their guanxi networks and understand the distinction between guanxi and illegal activities.
China is facing a large population imbalance; there are currently around 120 boys for every 100 girls and, by 2020, there will be 30 million more men than women (Hongzhou Learning, 04.08.2016).Women make up 48.6% of China’s population(CIA, 2015), which meansChina's gender imbalance is expected to leave at least 30 million men of marriageable age single by 2020(U.S. Congressional-Executive Commission on China, 10.31.2008) and could make marrying much more difficult than it already is. Cultural changes are also affecting women, who are now marrying later, with the mean average age a woman marries now 25 years old in 2015, compared to 23 years old in 2011 (The World Economic Forum, 2015 & 2011).The divorce rate has been on the rise too, from 1.1% in 2003 to 2.7% in 2014 (an increase of over 150%) (Ministry of Civil Affairs of the People’s Republic of China, 2011 and 2015). Furthermore, China’s one-child policy, along with the lower number of Chinese women,is producing no more than 1.6 children each(below replacement level), a rate too low to keep the population constant (Cohen, N., 05.05.2013) and which has led to a substantial gender imbalance (Guardian News, 29.10.2015).
Over the years, China’s educational system has evolved,which is a key factor of change when it comes to the role ofguanxi in business. The government statistics show that the education and training level of migrant workers is increasing. 23.8% went to high schools or received higher education, a 1% increase from 2013, and 34.8% received skills training, a 2.1% increase (Danning, M., 30.04.2015). Those above 45, who were educated in the 80s, and those under 40, who were educated in the late 80s, have different attitudes towards guanxi which leads to different styles of management practices
China is ranked as one of the largest countries with the largest percentage increase in people aged 60+ (World Economic Forum, 26.01.2012). (Hodin M., 14.06.2013).The working age population of China is shrinking, and the proportion of the country’s population aged between 15 and 64 has decreasedin recent years (Guardian News, 29.10.2015).The drop was even greater among those between 15 and 59: it fell from 915.8 million in 2016, down 3.7 million from 2013, and that trend is expected to continue (Guardian News, 29.10.2015). As a result, the demographic change will drag on growth rather than drive it, which will radically reshape China’s economy (Rohr, D. CFA., 03.28.2017). The Chinese government is aware of the impacts of an ageing country, and part of China’s 12th Five-Year Plan called for bringing 93% of elderly care out of long-term institutions and into the community and home (Hodin, M., 14.06.2013).One consequence of an ageing population has been the increase in parallel of the proportion of people dependent on those of working age (Guardian News, 29.10.2015).
As China’s reform seeks to address social inequalities, corruption and enablecompanies to conduct business fairly, allowing every business equal rights and opportunities, the need for personal guanxi will undoubtedly evolve but will always remain, even with a free market economy, something the modern Chinese cannot live without (Su, C. Littlefield, J.E., 2001). The traditional guanxi rules and ethics that, prior to 1949, applied broadly within Chinese society are no longer understood (Hoffmann, W. J., March 2013).The concept of guanxi ischanging, becoming more visible and more sophisticated with an emphasis on business outcomes more than political ones(Jin, A., 2006).Yet, either way, guanxi still plays an important role in Chinese business, so foreign companies need to understand how to use it effectively and efficiently without breaking any new laws and regulations. The future of guanxi may be uncertain, but guanxi relationships, with their unique code of conduct, will always be an ingredient of doing business in China(Ai, J., 2006).
It should be recognised that guanxi is a powerful source that companies can leverage. However, it is important not to believe the hype that guanxi alone can enable a company’s success in China;they will still need to have a strong business plan to be successfulon top of guanxi. Guanxi is an instrument that is put in place where the rule of law fails to reign supreme. There is a fine line between guanxi and bribery, and China has been undergoing many changes to drive out corruption.Companies who want to succeed in China need to understand guanxi and how it works, and although guanxi networks would be a necessity, they are not sufficient alone for business success in China (Guthrie, D., 1998; Tsang, E.W.K., 1998). Foreign investors should understand how to retain the benefits of good guanxi while maintaining ethical business conduct in China; otherwise,at best they might not succeed and at worstthey may end up in jail – or worse. Therefore, corporatising a guanxi network, which is sometimes called Multilateral Relationship Development and Management (MRDM), is a critical first step for multinational companies (MNC) to control important outcomes in China and to mitigate risks of corruption (Hoffmann, W. J., March 2013).