News / Insights

Best practices when developing business relationships in China

Westerners too often dismiss nuance when doing deals in China or, even worse, are not sufficiently aware of what is happening, due to an overreliance on their value system. Failing to reconcile ethical issues or Lunlixue 伦理学 can easily lead to conflict in what should be a practical and commercially successful deal.

Since a core tenet of Chinese thinking is to avoid conflict, it is best to start with some fundamentals and an understanding of a holistic approach or Zhengti Guannian 整体概念 whereby it is typical to discuss multiple issues simultaneously, emphasizing the whole deal over individual elements.

No term is settled until everything is agreed and this can cause variability throughout the process and be the greatest source of conflict. Westerners need to appreciate that the Chinese language is composed of characters based on concepts and not an alphabetical sequence. It is also not productive to think of negotiations as a confrontational as an “us” and “them” stance but rather interpersonal harmony or Renji Hexie 人际和谐: so avoid being rude should a conflict arise.

So how does this relate to practical deal-making? For starters, the typical term sheet process where both parties agree on LOI/MOUs based on definitive terms does not always work well in China and can often cause delays and uncertainty. Other delays can be due to thrift or Jie Jian 节俭 by not committing to extraordinary legal expenses, greatly frustrating Westerners.

Once terms are “agreed” it is best to anticipate changes, while not relenting on the core proposition. This seemingly “Alice in Wonderland” part of the process requires hard work, patience and endurance or Chiku Nailao 吃苦耐劳 while also avoiding loss of “face” or Mianzi 面子 where broken promises, verbal and written, displays of anger or other aggressions can be deal killers.

Drafting terms into a definitive agreement, where Westerners will deepen through legal sophistication, the Chinese will sometimes broaden by adding new terms, creating conflict with the Westerners screaming “re-trade”, an unpleasant and emotional response that can also kill a deal.

Bankers don’t need to become anthropologists, cognitive scientists or even linguistic specialists. But some appreciation and respect of Chinese thinking will go a long way in managing conflicts.

By: Daniel Phillip Senger
Dan is a Partner at CDI Global China – Wilton Partners, a boutique M&A firm, and 35-year investment banking veteran, based in Shanghai. He has been a “China Hand” for 16-years starting with restructuring of the equities business for the former Beijing Securities, now UBS Securities. Dan previously worked in New York, Chicago, London, Tokyo, and Hong Kong.