People’s impressions of China are often flavored by images of strange clothing and songs, or by students being gunned down in the 1989 Tiananmen massacre. By poverty, repression, and by the image of rice farmers ankles deep in mud. Possibly the most recent thoughts in people’s minds though are of prosperity and of all the products that they have been buying recently from this country.
This paper is designed to help any entrepreneur understand Chinese business and to be able to apply this in starting a profitable Chinese business or legal purchasing goods from China to sell in the United States. China’s economy is an exciting place and for the adventuresome capitalist there is a potential for huge gains and losses everywhere.

There has also been a huge momentum of growth in the Chinese economy, in large part due to foreigners investing capital and resources. The Chinese investment is part of a world profit driven search by business for cheap hard working labor, stable government, and large new markets.

China has great promise in all these areas. This is not to say that the process of starting a business here is easy. The largest problem is the lack of information about how to, and where to profitably invest money in China.

Although where your feel your money will be most profitable is up to your own investigation, I hope to give you a general idea of China’s business and cultural environment, a historical framework to put it in, and explain some specific procedures and forms that are needed. I will do so from the perspective of a foreigner in Kunming, the capital of the southwestern province of Yunnan, where I have been doing my research. Although different provinces may have different procedures, many procedures are universal.

China’s History with Foreign Relations

“Zhong Guo” is the Chinese word for China. It means middle or central country. The Chinese people have had a very rough transition period from thinking of themselves as the civilized central country for the last 3000 years with nothing but barbarians all around them, to being humiliated by these foreign powers until October 1, 1949, the start of the People’s Republic of China. This humiliation and exploitation is not forgotten nor the idea that China should be the central and greatest country.

There is also a great deal of anger and blame for the past military and economic imperialism. There is still living reminder of these times and frustrations. Many Chinese history book’s rage flavors the history and thus many Chinese people’s view of the world and foreigners. It is common knowledge that foreign governments took advantage of China’s instability from the 1800s through the 1930s. In order to understand this resentment and be ready for it, it is important to actually know China’s history and the people’s take on it.

When Britain first came to China, it demanded many goods from China, while China had no need to buy any thing from Britain. Britain not liking the out flow of gold from its country started selling opium as a drug supplier to China. For many years Britain’s chief export to China was opium. When the Chinese government tried to stop the drug trade, Britain brought in war ships. This became called the first Opium War, which ended in The Qing government being forced to sign some concessions to allow trade and open some ports.

Trade expanded greatly, and the concession ports became too small. By now lots of countries also wanted a share of China’s market. The “foreign aggressors” mainly France and Britain found some flimsy pretext to go to war and thus the second Opium war. Although the Chinese history book I read said China lost because of incompetence of the Qing commanders, perhaps superior weaponry and a Navy were also a disadvantageous to China and soon a new treaty was to be sighed. Then came the international incident.

“The British and French ministers, accompanied by armed forces instead of talking the route prescribed by the Qing government, insisted on forcing their way into Dagu. They were repulsed by the Chinese defending forces.”

The French and British then sent more troops and marched them all the way to Beijing. The emperor had already fled and his brother negotiated a settlement “shamelessly acceding to all the rapacious demands of these foreign pirates, in order to secure in exchange their co-operation in the suppression of the peoples revolution.”

The Qing government soon became a tool for foreign powers for the suppression of the “heroic common people”. With fellow imperialist permission, Japan took Taiwan, Britain took Burma, and France took Vietnam. Japan next took Korea on the excuse provided by a coup. Russia took large portions of northern China.
Besides the outright censures of sovereign parts of China, capitalist imperialism did the same thing with money as troops did with territory. Foreigners built and owned huge portions of railroads industry and business all over China. The control this money provided in the form of special leases and treatments of different areas became so strong that in a process referred to as sphere’s of influence China was carved into pieces each belonging to a different foreign power at complete disregard for China’s national sovereignty. China was in many ways reduced to a colony.

“The United States having no sphere of influence in China, proclaimed the so called “Open Door Policy”. This was a policy under which the powers were required to throw open their leased territories and “spheres of influence” in China, to enable the United States to enjoy equal opportunities and privileges in the exploitation of China and it’s people… It was in this insidious way that the United States began aggressive activities aimed at its domination of China” The people of China were fed up with foreigners and tried several ineffective reform efforts to correct the injustices done them. A revolutionary movement called the “Boxers of Righteous Harmony” came to represent the people. This movement was anti-foreigner with killing foreigners, and loud protest. The Qing government largely supported this movement. As a result, “The combined forces of the eight powers advanced on Beijing…The troops of the imperialist armies indiscriminately killed civilians and burned villages in the course of their advance on Beijing. In August 1900 they marched like robbers into Beijing in search of “war booty”. The outrages and atrocities?? arson looting killing and raping??committed by these aggressive armies in and around Beijing, Tianjin, and Baoding have seldom been equaled in world history.”

The Qing Government, which had given support to the movement, fled to Xian and blamed all the problems on rebels and uprisings that they just couldn’t control. After this, the imperialists again place the Qing government in power, this time as puppets.

The trade imbalance and the huge indemnity that the Chinese government was forced to pay pulled money out of China. Revolution was still imminent. The Qing government went through a number of reforms trying to prop-up their power. One such reform was the nationalization of the railroads. This reform was highly resisted by the people who didn’t want “to place all rail control in the hands of the Imperialist puppets”. Widespread strikes occurred and toppled the Qing government.

Dr. Sun Yet Sen, using slogans like “Liberty, Equality, and
Fraternity” rallied the workers and had got the strike movement going. His groups also put out slogans such as “in the past there were Heroes’ revolution, today we need a peoples revolution”. However the fruits of this revolutionary instability however went to a Yuan Shikai, a military leader who convinced the royal family to abdicate to him in 1911. His military power united China physically, while he allied with the foreign aggressors, repressing the people.

“His sudden death in 1916 left political power in the hands of his successors known as the Beiyang warlords.” This began a period of anarchy where many different groups took Beijing and proclaimed themselves the supreme government, but no one had any real control. It was a very terrible time for many Chinese people.

World War One kept most of Europe busy, but Japan was politely extending its reach into China. The Versailles Peace Conference suggested giving Japan all of Germany’s old “rights” in Northern China.

The Chinese people, who have had a long-standing disregard for Japanese people, were not even consolidated, and they were horrified. Mass protests took place. Officials in favor of capitulation were beat up and had their houses burned. In many ways this time united China.

At the same time the revolution in Russia was bringing in new ideas of socialism. “People began to arm themselves with the ideals of Socialism.” Socialism began to take shape as many people supported it and took part in the May 4th moment. People were ready for any kind of hope and change because “Under the triple exploitation of imperialism, feudalism, and capitalism the working class had been reduced to a miserable state.”

The United States and Britain pressured Japan into giving up its claim on North China, but “each power cultivated a different war lord and used him as an agent” to increase their influence.

Sun Yet Sen was setting up a wide revolutionary front including the communists, but in died in 1925 leaving a vast legacy. Soon after his death some leaders were killed in a strike at a Japanese cotton mill and popular sentiment was aroused. A mass protest against the Japanese was broken up with bullets. 10 were killed and 15 seriously wounded. This became known as the May 30th Massacre. This led to nation wide strikes and similar events at a British cotton mill and to the Shaji Massacre with about 200 killed. Machine guns were used. This brutal suppression greatly increased support for the revolutionary movement and caused resentment towards foreigners in general.

Chiang Kai-sheck took over the consortium formerly headed by Sun Yet Sen. Sheck with the backing of foreign powers defeated the other warlords. At this point Chiang Kai-sheck decided that he would dispose of his former allies the Communists. He tried an extermination campaign and killed as many Communists as possible. The Communists however, were never completely exterminated. They formed an army and used guerilla warfare. Chiang tried many campaigns to encircle and destroy them.

1929 Japan launches a surprise attack on China’s northeast. According to China’s History books Chiang adopted a policy of “nonresistance”. The world community launched “an investigation” and “The Soviet Union under the leadership of Stalin was the only country which upheld justice and firmly denounced Japanese aggressive.” Japan took Shanghai next.

World War II had already started for the Chinese. According to the
Chinese history books Chiang never stopped fighting the communists, and forgot completely that his country was being over run by the Japanese.

The Japanese war crimes in China are horrendous. In a massacre refereed to now as the Rape of Nanking, 300,000 people including women and children were killed in seven days. The Holocaust in Germany gets huge amounts of attention, but events in China are in many ways worse. At this time the long-standing hatred came out in the worst way. The Communists extended several peace overtures, but fought bravely against the Koumingtang and the Japanese. At the end of the war the Kuomingtang Authorities, however decided to rob the people of the fruits of their victory in the War of Resistance. They convinced with the Japanese and puppet troops and ordered them to resist the Peoples Liberation Army. This allowed the Kuomingtang, supported by the United States, to pretend to save China and leave the Communists out. This led to a new civil war, which lasted until 1949. In the end the Communists were victorious and the Kuomingtang fled to Taiwan.

This is the history, but if you read many Chinese history books the flavor is very prejudiced and only recently has there been any other differing takes on history available.

This history explains why on TV and movies in China the most common nationality for a villain is the Japanese, the slimy week capitualationist is almost a stock character, and the hero of the people never bows to foreign pressure.

Although this history leads to some distrust, I have not seen any out right hostility to myself. It is however the reason that there is a huge amount of regulations about what and how foreign businesses can do.

China is very careful that foreigners and foreign business will never again have the same powers that it once did or ever threaten its sovereignty. It helps one to understand what the mountains of legal work and strict regulations for foreigners are for. China does not live in the past anger at exploitation by foreign powers, but it has not forgotten, and it will never relive it.

Economic History

“When the Communists took over China in 1949, only 15 percent of people lived in cities, only 5 percent comprised the industrial population, and the National income per person was only $50.”

The communists took over a country with a war torn economy. It needed to stop hyperinflation, redistribute land, and find a way to improve the lives of millions of poor and even starving people. To do this, industry was nationalized, land was distributed and the first five-year plan was put into effect. The north area of China was developed and output of industry across the nation expanded quickly, although food production expended slowly. The government collectivized farms into communes as it instituted monopolies on markets such as grain in 1953. This was in an attempt to widen the price scissors i.e. widening the margin between selling industrial goods from government factories at a high price, and buying agricultural goods at low prices. This took the alleged surplus from agriculture to reinvest it in industry.

A poor grain harvest and a cut off of Soviet aid helped in causing the Great Leap Forward. Its goal was a self-strengthening. Many communes developed “rural industry in backyard production facilities, and basic industrial products increased ’58-’59 although quality was generally very poor.” This also had the effect of taking too much labor away from agriculture. This caused food shortages and famine thus “some where between 15 million and 30 million deaths during this time”.

Mao allowed a different group of reformists to take over in 1962 and once again good growth rates were achieved. But in 1966 The Great Proletarian Cultural Revolution once again put the country in semi anarchy. Mao??s hope to achieve perfect communism was put into practice and the reformers were expelled. Red Guards and nationalist spirit managed to drown out national reason and in 1967 virtual anarchy through out the country. Mao had to send in the People’s Liberation Army to restore order.

Mao died in 1976 and Deng Xiaoping became the new leader of China two years later. He put into effect gradualist reform and set up special economic zones. He also restored private plots to peasants and allowed households to freely sell anything produced above quota. This caused a huge increase in grain production. “In 1984, 14 cites were declared to be open cities” where investment was encouraged. There has been a huge amount of foreign investment into the economic Zones. Although the Tiananmen SquareIncident in 1989 shook international confidence in China’s reforms and economy it retained its gradualist path in economic matters. In 1993 the CCP officially declared a socialist market economy to be the goal of reforms. Now after Deng’s death in 1996 Jiang Zeming is now the leader in China. Jiang seems to still be on the path of gradual reform.

Despite this good leadership transition China has suffered recently because many of its local trading partners hit economic collapse known as the Asian Flu. This has slowed investment and trade levels for China. China’s current problems include having large numbers of bad loans to its money losing state industries. It has recently been restructuring and is trying to shut down these industries, but with growth rates slowing unemployment is becoming a problem. China still has yet to develop social safety nets to protect its people during the transition. China therefore needs to keep its growth rate high to keep its population employed and minimize social pain. China has recently declared cut backs in the army and in state jobs as inefficient state industries are closed. The goal of all this reform is to free formerly unproductive resources so that there are more economic goods for everyone. This will be good for China in the long run and socially painful in the short.

Note: The article above may not contain up-to-date information.

See also…

Doing Business in China

International Law Issues