Be Aware Fraud Risks

China is constantly plagued by fraud scandals. Anyone, whether only doing business with Chinese companies, managing a subsidiary, seeking investment opportunities or conducting merger & acquisition possibilities needs to be aware of China’s high fraud risks. The strong focus on family well-being, the urge to gain status through accumulation of wealth quickly (→ Social Concepts: mianzi), weak controls and a generally relaxed attitude to fraud seem to drive such actions. Not surprisingly, Chinese pay great attention to building trust in business relationships and checking the partner’s credibility thoroughly.
The main risks can be categorized in four areas: low integrity, corruption, misrepresented finances and the misappropriation of company assets. Managing fraud risks is…


Chinese Migrants: The Hukou System

The term hukou (pronounced who-koh) refers to China’s household-registration system, which defines access to welfare. Required by law since 1958, the system records every Chinese citizen as a permanent resident of a particular city or county. Before 1980, citizens were strictly required to stay in the neighborhood of birth and could not seek employment or education elsewhere in the country.
Dating back to China’s ancient ‘class-system’ permits, the hukou system was originally intended to register people and deliver them appropriate social services. A more lenient version of the regulations persists today, requiring any Chinese citizen staying outside of their hukou for longer than 3 months to apply for a temporary residency, involving a working contract and extensive paperwork. Rural migrants desiring to relocate to cities still encounter many difficulties including qualifications and contract hurdles.
“Illegal” rural migrants without a temporary permit, are fully in the hands of their employers…


Work Culture and Effective Management Style

China’s work culture is still strongly influenced by traditional Confucian values, even though newer generations of Chinese employees are beginning to challenge these old standards.
In earlier days, organizations tended to be built on loyalty, or guanxi (→ Social Concepts: Mianzi and Guanxi), rather than merit. The leader would choose staff according to personal and professional connections – people who the leader knew would be loyal. This provided leaders security in their position and ensured that strong subordinates would not attempt to replace them. Many local companies still operate in this manner. The concept may have lost some of its dominance, but personal loyalty still holds great influence in company life and is often valued more highly than company loyalty. Because of this, Chinese companies face a great risk when key personnel leave, since their colleagues often follow suit due to guanxi.
In China, hierarchy and title are highly respected in the workplace. The management style tends toward….


The Education System: The Big Picture

Education holds great importance in China, opening the door to promising professional careers, wealth, and financial security for the whole family. The Chinese strongly believe that a school or university with a better reputation gives a better education and assures a good future. Accordingly, Chinese are willing to invest a huge part of their income on their children’s education.
The education system was nearly destroyed by the negative impacts of the cultural revolution. In recent years China has made rapid progress in improving the system once again. Initially built around “key” schools and universities for a small elite (a concept that still exists today on a small scale), the leadership has implemented numerous reforms to resolve the problems of disparity and inequality in education. These initiatives were geared towards raising the standard of education across the country and included school ratings to achieve minimum standards, increased public funds for rural schools, and systematic teacher transfers (urban teachers sent to rural areas and vice versa).
However, the system still emphasizes repetitive learning rather than deep understanding and problem-solving skills. Thus, it has strong limitations in producing school graduates with creative…


Domination of State-Owned Enterprises

China runs a bifurcated economy. While a robust and competitive private sector dominates industries like clothing, food, and factory-assembled exports, sectors of strategic importance such as railways, financial services, utilities, energy, telecommunications, education services, and health care are generally not open to private investment. These protected sectors are extensively controlled through government interventions and often dominated by large SOEs.
The 1990s saw big changes for SOEs, as the government forced companies not making a profit to either merge into larger corporations or to file bankruptcy. Many of these remaining SOEs have since become private companies. They have emerged as modern, restructured, share-holding firms listed on the domestic stock market. But even though the Chinese government has legally separated itself from these companies or sold a minority of their shares, either the state or local governments or SOEs often retain the majority of the shares.
The Chinese National Bureau of Statistics uses a very strict definition and views SOEs as only those economic units where 100 percent of the shares are owned by the state. The most important of these SOEs (currently 117 corporations) report directly to a special commission under the State Council…

Oct. 29, 2014 Duke University, NC, USA

We are scheduled to speak at Duke University (Durham, NC, USA) on October 29. This time we will speak to master students in the Pratt Engineering Management & Leadership class. We will focus our speech on China 2.0 and our experiences as a manager and employees in Mainland China.