Foreigners in China Must Learn the Rules of the Road

Rebutting a critique of today's China
Crowds walk down Nanjing Road East in Shanghai, China Photograph by Qilai Shen/Bloomberg

After 16 years in China, British businessman Mark Kitto had enough. The previous decade and a half had been a trying time. He had started That’s Shanghai, a favorite rag for expats to check out photos of partygoers in the hottest nightspots, which he lost control of in a fight with his Chinese partner. Reeling from the loss, he ventured outside Shanghai to open a boutique hotel in Moganshan, a scenic protected spot, but that venture’s profit failed to live up to expectations.

Tired and frustrated, Kitto has penned a piece titled “You’ll Never Be Chinese: Why I’m Leaving the Country I Loved” for Britain’s Prospect Magazine that maligns current Chinese society and blames the business and political environment for his struggles. “I have fallen out of love,” he writes, “woken from my China Dream.” He adds: “Don’t you think, with all the growth and infrastructure, the material wealth, let alone saving the world like some kind of financial whiz James Bond, that China would be a happier and healthier country? At least better than the country emerging from decades of stultifying state control that I met and fell in love with in 1986 when I first came here as a student? I don’t think it is.”

Kitto expresses sentiments many foreigners and Chinese feel—the drive for riches has left a country awash in BMWs but also poisoned by smog, stuck with a tottering education system, and bereft of ethics. Anyone who has spent time in China deciding where to buy dairy products or vaccines for their children can sympathize with Kitto’s feelings.

It is true that foreigners are never really viewed as Chinese. The sooner foreigners accept that, and learn what limitations that means, the faster they can focus on building profitable businesses. Few foreigners have lived in China for decades (even five years is considered a long time by many), so most are viewed as vagabonds or long-term tourists ready to be sent home when their expat packages end.

What strikes me, though, is the lack of introspection in Kitto’s farewell note. A closer look at his decision-making shows many of Kitto’s challenges could easily have been avoided if he understood better what not to do in China.

First, Kitto should never gone into media, a highly regulated sector where foreigners cannot legally operate easily, if at all. He should have expected the regulatory nightmares he complains about in a country that regulates the media with an iron fist, and it seems he never had a clear ownership structure. (See my column, “How Not to Run a Business in China.”) If you do not have a clear ownership structure and operate in a sector where the government does not welcome foreign investment, one cannot expect legal protection or support from authorities when things go wrong (as they always do).

When crafting strategies, businesses need to do what the market demands and what the Party allows specifically for foreigners. Know your limitations and do not expect to operate with the same opportunities as Chinese. It is not an even playing field and never will be. Don’t try to make it one, or you will end up banging your head against walls as Kitto did. Let your nation’s government—or larger companies with long investing horizons, such as General Electric—do the pushing.

Second, Kitto had far too long an investing horizon. He should have built his business model to generate profit in the short term. He rails that the government held his hotel project hostage by forcing him to reapply to extend his lease every three years. But if he could only get a short-term lease, Kitto never should have started a business that needs large upfront capital costs in the first place.

China is rapidly urbanizing. City residents as a percentage of the overall population have increased from 30 percent two decades ago to 50 percent today. The practical reality of all that activity is that unless your business is located in a large real estate development, it will likely get literally knocked down in the future. Local officials, too, cannot give long leases for smaller projects, especially in beautiful areas like Moganshan, because higher-ups might exert their power, so be wary of investing in a place that could draw the attention of powerful forces. Instead, Kitto should have raised more capital and done something big, built his hotel in a less protected area, or spent less money on renovation.

Finally, the number of foreigners moving to China has been rising 10 percent annually since 2000. They need to remember that operating a business here is not easy, and they need to be patient. China is no longer a cheap place to do business, and competition from domestic companies is fierce. Successful businessmen will keep getting back up on the saddle if they fall off, and they won’t attack their host country with such anger as Kitto did. If Kitto ever decides to come back, most people will view him more as an interloper than someone dedicated to the China market.

    Before it's here, it's on the Bloomberg Terminal.