When East meets West.

• Author: Graham, Lynford E.
• Position: Investing in China - Includes related article - International Business: China

Before your company heads to China you need to know how to play by Chinese rules - and they keep changing. Here's a first-hand report on its complex business climate.

The 50 delegates for last year's People to People International Program were about to leave Shenzhen, China, for their return flight to Hong Kong when torrential summer rains trapped them in their hotel, recalls Alvin Carley, delegation leader, and Lynford Graham, a delegate. The group watched in amazement as the water level rose up to car roofs and people floated by in makeshift wooden rafts, umbrellas in one hand and briefcases in the other.

Clearly, it wasn't the best traveling weather. But the delegates cheerfully made the best of it. Their afternoon meetings were canceled, so they lectured to each other instead. And in the end, the rain stopped and they made it to the airport in the nick of time, Carley reports. That was the exciting end to an eye-opening two weeks in China to talk with Chinese government officials, businesspeople and educators. Here's what the delegates learned from their adventures.

These days you can hardly pick up a business magazine or financial newspaper without seeing a story about the newest "investment haven" - China. And with good reason, because the reforms of recent years have turned a cloistered socialist economy into a huge potential marketplace. China's gross domestic product in 1994 was estimated at nearly $520 billion, with a growth rate of 12 percent, but many experts think the economy may actually be several times larger. In fact, some sources have predicted China's economic parity with Japan by the year 2000, and with the United States a few years afterwards.

With U.S., European and Japanese market growth at modest levels, such an opportunity couldn't have come at a better time for foreign investors. You always hear about America's largest companies, such as Ford, IBM and Boeing, making inroads into the Chinese market, but plenty of smaller businesses are also pondering China's investment potential. These technology companies, service businesses and niche manufacturers need direction on what to expect and how to accomplish their objectives with more modest resources. The rules of business in China are different from those in the United States, and they're changing very fast, so whether your company is large, medium or small, you'll need to do a great deal of analysis and create contingency plans before you jump in.

Recently, we returned from meetings in Beijing, Shanghai and Shenzhen as members of a two-week People to People International program. We talked with a variety of Chinese professionals, including practicing public accountants, employees of international finance companies, the Shenzhen Stock Exchange, representatives of the Ministry of Finance, the State Taxation Department and educators from the Shanghai University of Finance and Economics.

Before the program began, we agreed to focus on certain issues important to financial - executives investment alternatives, financing, taxation, financial reporting and currency restrictions - and communicate our findings. As members of the first delegation of this type, made up of nearly 50 educators, auditors and corporate financial executives from 11 countries (of whom a dozen were Financial Executives Institute members), we found the program provided rare direct meetings and one-on-one opportunities to share knowledge and increase mutual understanding between ourselves and Chinese accounting professionals. These meetings gave all of us an opportunity to put our understanding of Chinese accounting thought and culture in perspective with the current economic boom.

TURBULENCE AHEAD

We discovered that the China of today is vastly different from the China of a few years ago and is evolving rapidly. By the year 2000, we'll see a substantially more developed China. But expect lots of bumps along the way. This past year alone has seen at least three major trade crises. If history is any indication, we'll continue to see brinkmanship in negotiations, but the mutual economic needs of these two great nations will, in the end, encourage resolutions.

The pace of development means financial executives need more than ever to know China's critical business pressure points. Veterans of previous foreign- investment frenzies will find the China experience different from that of the Commonwealth of Independent States, Central Europe or Latin America. China has created a unique "socialist-market" economy, inviting investors to bring their capital, technology and other skills and create a "partnership" with China. Make no mistake: This isn't yet a free market economy, but the ministries are committed to creating policy and a regulatory environment that will attract partnership capital to stimulate economic advancement.

Because the changes underway involve deep ideological issues (moving from a communist to a market-based economy) and cultural changes (the shift from a rural to an urban society), the transition needs some structure, lest China repeat the turmoil in the Soviet Union.

That's the task of the nation's State Council which, through the Ministry of Foreign Trade and Economic Cooperation, tries to control growth, dampen inflation and avoid "boom-bust" cycles. Past political and economic invasions of China by other nations have also given the country a strong cultural impetus not to...