Just when China is about to sell off its state sector and expand its market economy, U.S., Japanese, and even overseas Chinese investors are complaining about broken deals, crooked courts, and no profits in their operations. A wave of incidents sweeping provincial China, far from the more economically sophisticated coast, is casting a cold spell on foreign investors doing business there. Unless Beijing enforces the rule of law in far-away provinces, China will eventually experience a fall-off in investment that will hurt growth.
The problems in China of America's Kimberly-Clark, Bangkok-based Charoen Pokhand Petrochemical, and Japan's Matsushita Electric share a common thread. They were all betrayed by joint-venture partners in far-flung provinces who broke contracts and either cheated them, illegally competed with them, or both. The local courts were of no use because, in many cases, they were aligned with the local partners. The same was true for local party officials and bureaucrats.
If China is to benefit from opening its economy to foreign investment, it must find the means to stop unscrupulous behavior. Now, more than ever, it needs the rule of law and the end to guanxi.