Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

For Some, Chinese Promise Turns to Nightmare

BEIJING -- Along with the welcome mat and warm handshakes awaiting foreign businesses that invest in China are some unpleasant, often costly, surprises.

For McDonald's, the unexpected came in what amounts to an eviction notice this month. The fast-food giant says Beijing officials had promised a 20-year lease on Beijing's choicest street corner.

For Australian businessman James Peng, it was being kidnapped and enduring a year's detention in the southern city of Shenzhen before he went on trial Nov. 16 on charges of corruption and embezzlement.

In the past three years, about 20 foreigners or Hong Kong Chinese are known to have been illegally imprisoned in China following disputes with their Chinese business partners.

Consultants familiar with China say such misfortunes are not signs of a dramatic deterioration in the investment environment.

But they are reminders -- along with inflation averaging over 20 percent a year, skyrocketing wages, a credit crunch, bureaucratic hassles and distribution bottlenecks -- that doing business here can be perilous, as well as profitable.

Many problems stem from vaguely worded laws whose interpretation seems to be arbitrarily suited to the moment.

"Laws are not clear. They are broad statements of principle, and nothing is fixed," says Anne Stevenson-Young of the U.S.-China Business Council in Beijing.

McDonald's believes it had a legal right to spend 20 years at the intersection of Wangfujing Street and the Avenue of Eternal Peace -- just down the street from Tiananmen Square -- when it decided to build its outlet there.

McDonald's says it has not been officially notified that it must move and it plans to stay put.

The 2,520 square meter, two-story restaurant is McDonald's largest in the world, and one of its most profitable.

But Beijing officials say it must move to make way for a huge commercial complex planned by Hong Kong developer Li Ka-shing, as have many other retailers on the busy street.

"This is not going to scare away foreign investors, but it is likely to make foreign retailers more wary of their property exposure in China," says Bob Broadfoot, director of the Economic and Political Risk Consultancy in Hong Kong.

Of greater concern, Broadfoot says, are tax laws that seem designed to confuse.

China announced a 17 percent value-added tax in January, but exempted products made for export by foreign-funded firms. In August, it said it would end the exemption for foreign firms.

Then the Finance Ministry issued a special notice reassuring foreign investors that their tax burden would not rise. Few took comfort. "We all have to look at the fine print on exactly where we stand," Broadfoot says.

The risk of being forced out by a development, or of having one's rent arbitrarily raised by several hundred percent at a time, is no greater in Beijing than in many other Asian cities.

More worrisome are misunderstandings that arise because foreign partners fail to assess the potential human hazards in their China ventures.

Several Western investment banks are still smarting after losing millions of dollars on copper trades by the Shanghai subsidiary of China's International Trade and Investment Corp. on the London Metals Exchange. The deals, financed by the banks, were apparently made on margin without authorization.

The case is one of several in which Chinese partners appear to have reneged on their obligations to foreign investors.

"People tend to look at China as a money problem and not a people problem. There was not enough due diligence about the people the money was going to," Broadfoot says.

These sorts of disagreements tend to leave both sides feeling abused.

The official press is rife with reports criticizing China's tens of thousands of joint ventures and accusing them -- sometimes with good reason -- of evading taxes, breaking labor laws and generally failing to live up to expectations.

The government recently toughened controls over foreign-affiliated firms, partly to combat the widespread practice of setting up bogus companies to evade taxes and get around laws against importing foreign luxury cars. It also has decreed that all foreign-funded firms must be unionized.

In many cases, the police -- and sometimes the courts -- have backed aggrieved Chinese partners with the kind of vigilante justice that landed James Peng behind bars.

Peng has pleaded innocent to charges that he embezzled $133,000 from the joint-venture firm he established in the southern boomtown of Shenzhen as well as secondary charges that his employees borrowed 290,000 yuan ($34,000) in his name.

In Chinese trials, however, the defendant usually is presumed guilty.

Philip Hui-Ho Cheng, an American who runs a safety-helmet business in southern Guangdong, was thrown in jail in August 1993 after his Chinese partner suddenly demanded back all of his share in their joint venture.

When Cheng could not arrange an immediate repayment, the Chinese partner arranged to have his brother-in-law, a local judge, throw him in jail. It took Cheng over two months to be released and almost seven to recover his passport and leave China.

"Let the investor from outside the mainland beware," Cheng wrote in a letter to the Wall Street Journal after his release, "for too often plans don't go as envisioned, and sometimes they go terribly wrong."

Stevenson-Young, of the U.S.-China Business Council, suggests that foreign investors take similar gambles in other developing countries.

"It's no worse or better," she says. "China is struggling to develop a modern economy based on laws instead of on people. It's extremely difficult."