REAL GUANXI: CHAIRMAN MAO

I want to break down a term that might be confusing to many business people. Guanxi…. When people talk of guanxi (pronounced gwan-she) they often translate it as “personal relationships”. Sounds good right? Who doesn’t want good personal relationships? The reality is that when someone says the word guanxi they might have a number of meanings in mind. So it can get confusing. Even for Chinese.

FAMILY OR CLAN GUANXI:  HOW DO YOU GET IT?

You or a family member rises to a high government office.

Limited Time: Family members whose patriarchs have had the good fortune to rise up in the Chinese Communist Party have a window of opportunity to cash in on their connections. As new groups rise and fall you will either have guanxi or lose it. It’s black and white unless you are related to Mao Zedong. For most political families, opportunity is fleeting and tied to a specific leader and his clan.  As soon as the person you or your family member has hitched himself to loses power, your guanxi is toast.

If this were the US, as soon as Obama goes, everyone in his clan would lose power. Their guanxi would be gone. Never to return. It’s not like the Republican or Democratic Party. it’s tied to the individual. After he’s gone, and it is a he in China, the party is over. Well the Communist Party continues but your personal party is over.
Of course the political figure himself or herself cannot directly be seen taking valuable assets so guanxi is handed to relatives. Sons, daughters, close family friends. However, the wealth generated it not all theirs. It’s shared. Legal ownership means little. It’s family money.

What opportunities do people with guanxi get?  Concrete examples:

  • The fortune to get the first domestic insurance license. So that meant that foreign insurance companies that entered China had no choice but to partner with you as this was the only way in legally.
  • A banking license and you were the only one able to legally open a bank. This allowed you to have a monopoly for a limited period of time. No competition. And likely a significant number of shares for future public offering.
  • The rights to a large piece of land in a desirable area. So this land is in demand but only you have the rights to it.
  • It might be land, a license, a powerful military real estate license (one for every major city)
  • The rights to buy an apartment at a certain price. (so you get a piece of paper that entitles you to buy an apartment at xyz per square meter. However, you don’t have to buy it. You can simply sell the paper for the arbitrage (difference between the agreed upon price per square meter) or you can hold the paper, sell it later. Or you could buy it at that price, fit it out and rent it, live in it. Do what you like with it. Then sell at any point in the future.
  • The rights to be the sole supplier for a new service or product. So, for example, you could be given the sole rights to provide baggage scanners for the Beijing subway system. Or if your guanxi is good enough, and it has to be pretty darn good, you might get the rights to China wide subway systems. So in this case, you could either buy these scanners abroad and import with a guaranteed buyer (at a generous price I might add) or you could simply be the license holder. So you could partner with someone else who does the work of importing and installing the machines.  It’s a great position to be in.
  • The sole rights to sell Olympic paraphernalia. This can be very profitable but it’s a one time thing.
  • The rights to produce automobiles. (This is an old example) So maybe you got the rights to produce cars in Shanghai. But you can’t produce cars because you have no experience. So you partner with a foreign auto manufacturer. This was a very juicy opportunity as Beijing was keen on building a local auto industry. So you might have additional opportunities if your “partner” was forced to do a “technology transfer”. Basically teach you their secrets for free.
  • However, keep in mind that there is also responsibility. You must do a good job, learn the business and grow the business. Eventually you are expected to build another business using what you learned from the joint venture. This was often accomplished, again, through family connections. So your brother may have headed a competing ‘home grown’ Chinese automobile corporation.
  • Or you might be given the rights to make an internet company that mirrors a foreign one. So you might be chosen to be the ‘Chinese Twitter’ or the ‘Chinese Google’ (just random examples) but in this case you are not given a license or a physical thing like land. But you are chosen to lead this homegrown competitor and are given generous tax breaks, access to universities, endless low interest loans. So even though you don’t technically have a monopoly or the ‘sole rights’ it works that way anyway. You might, for example, be chosen to be the default search engine in Chinese browsers or your competitor might be blocked. Of course, you have to be a good steward of the opportunity. Both for your future and for China. So you will be judged on that basis. You can lose the opportunity if you are too selfish or too poor of a manager that you lose control, go bankrupt etc.

How do they decide who gets what? 

In some ways it’s like chocolates on a conveyor belt. You wait your turn and see what shows up.But keep in mind that there are several levels of conveyor belts. They come up over time and you are given the opportunity in due course. It’s given to you based on your level of family guanxi.

WHAT IF YOU DROP THE BALL AND WASTE THE OPPORTUNITY?

What if you were given a large opportunity by the Communist Party through guanxi but you were a poor steward? What if you wasted the opportunity? Essentially you are throw out for life. Excommunicated. This is unforgivable.  Worst case scenario you are jailed for corruption for things that would have been overlooked had you excelled.

THE CHILDREN OF PARENTS WHO LOST GUANXI

This can be particularly hard on the children who grow up in the best schools, with great connections but are suddenly abandoned. Your powerful papa suddenly can do nothing. Often it’s the children’s connections that save the family from utter poverty as friends allow the use of houses free of rent. There is a feeling among officials that it could happen to them too so I would say that there is some sympathy from individuals. However, from the system itself, there is no mercy. You have failed. Get out. In other cases, children escape China and live happily ever after with their parent’s wealth. If left behind, things can be tough. It goes back to the nature of guanxi. It’s more of a onetime opportunity to get a government approved, monopoly most of the time.

AVOID PEOPLE WHO TELL YOU THEY HAVE GUANXI IN CHINA

Some people will tell you that “they have guanxi” and offer to do business with you. I recommend running as fast as you can away from these types of people. They will only cause you trouble, waste time and might even cause you to end up in prison due to corruption.

The other type of guanxi (i.e. bribery and corruption)
So we talked about guanxi opportunities in political families. There are other things called guanxi. One is bribery. So someone knows someone in power. And if you just give them some money, they will unlock the opportunity for you.

As has been written about before, I would avoid these people. Not because I’m politically correct. Not because I’m your mother. I’m telling you this purely because these people cannot do what they say and are time wasters. There is no benefit to working with them but there can be very significant risks. So, in a nutshell, they cannot get you that license for a hundred thousand dollars.

There was a time in China when they might have been able to. When I first got to China in 1989, this was the norm. And many business people succeeded by playing by the rules at the time. So some people that tell you this are simply out of date. If anyone who has not been living in China recently starts telling you about guanxi take it with a grain of salt. As with all things China, they change.

What was cool before, no longer is. And when you make the mistake of listening to the wrong person, the Chinese authorities will come down on you very hard. In fact, they will relish the opportunity. And you can see this happening now with companies that set themselves up years ago with a shaky foundation that was somewhat secure at the time. But times change. In China, times change fast.

WHAT DO REALTORS NEED TO KNOW ABOUT GUANXI?

For realtors and estate agents selling real estate to Chinese buyers, I would avoid the word guanxi. Avoid people who use the word. And get it out of your head that you can somehow use it to your advantage.

Many agents hire Chinese interns who come from good families. Good families in China means guanxi. This is the only type of guanxi I would recommend thinking about. In fact, this can work out quite nicely.

So, for example, you have an agency nearby a good school. And the students are top notch. Smart, speak English well and are looking for a part time job. You can take them on and teach them about business in your country. And, of course, you can learn from them. Talking to them, asking them about Chinese community in your area. How they think about various issues. You can learn a lot from these educated, well mannered students. And even make life long friendships.

So I guess I exaggerated when I said that guanxi is always bad. There is one use that can actually work for both you as an agent or broker and them as students who happen to come from powerful families.

So in short, guanxi hardly relates to you. Focus on the business at hand. Learning the nuts and bolts of building a business that caters to Chinese and other luxury buyers. If you happen to have a free desk and a good school nearby, invite some Chinese students over and see if you work well together.

Chinese students can be invaluable in helping you build your WeChat network.  But don’t be fooled. Guanxi isn’t for you. And anyone that has real guanxi isn’t going to be selling real estate on commission. There are bigger fish to fry. To learn how to build a business selling to Chinese clients join our VIP members area. It’s not easy but it’s worth it. Click here if this makes sense to you

 

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