Op-Ed Commentary: Chris Devonshire-Ellis
Chris Devonshire-Ellis began Dezan Shira & Associates before China’s legal services industry was codified, and when business and foreign investment laws were rudimentary. That led to some interesting and innovative solutions to establishment problems. This episode deals with the establishment of the first foreign-run bar in China.
Jun. 13 – Shekou was one of the first cities in China to open up to foreign investment. A natural deep water port, it lies 20 miles east of the main Shenzhen City which, in those days, was itself separated from Mainland China by a lengthy border just in case Deng Xiaoping’s experiments with capitalism and commerce failed. Although no longer operational, that border still exists and those are the checkpoints one still passes through today on the highway to Shenzhen City from the airport. Shekou, connected to Shenzhen by highway, was and remains linked to Hong Kong via a 40-minute ferry ride that takes passengers straight into Central. Many times I saw pink dolphins and porpoises on that route, although sadly I haven’t seen that for some years now. However, that ferry journey was, and remains, one of the most pleasant border crossings between China and Hong Kong.
Shekou was booming because it was the operational site for all of China’s earliest joint ventures involved in the oil exploration industry. Deng, finding out at the end of the 1980s that China had only three weeks of energy reserves left and an utterly inefficient energy resources ministry, re-wrote foreign investment law, opened up the oil exploration sector to foreign investment, and called on the world’s largest oil and gas exploration companies to come calling. The prize? Drilling rights in the South China Sea, home to billions of barrels of crude. That coincided with my newly-won China representative office license and permission to instruct on foreign investment laws and taxes, and is why Dezan Shira & Associates grew up from Shenzhen and South China as opposed to Beijing and Shanghai – which was where the very few foreign practices at the time had all set up. I had, in effect, a virgin market to myself.
Oil guys though are a breed apart. With the global industry focused in Texas, Aberdeen and Norway, these are big tough gents, burly as wrestlers, and as hard as nails. All had years of experience in tough operational postings such as Brazil and Nigeria, and they had dangerous jobs after all. South China has a long typhoon season, and four weeks on the rigs and four weeks off equated to a tidal wave of testosterone once they came ashore. But once ashore in Shekou, there was a problem. Shekou didn’t have any bars. Not only that, there were no laws permitting the foreign establishment of bars or restaurants in China at the time and no local was willing to risk opening such a venue and dealing with hundreds of burly, thirsty riggers on the prowl every evening. So what to do?
Lesson 1: It can’t be done
Although nowadays foreign investment law has become much more advanced, it still pays for lawyers advising on matters of China law to examine the reasons why certain areas are off limits. Rather than just brush the issue off as “impossible,” the diligent China lawyer will examine the issue in detail, drill down, and establish the real reasons why. Occasionally, intelligent legal arguments can overcome objections, and if not, at least the individual concerned is aware of where the block is coming from. It could be a myriad of reasons depending upon the specific case, and this can vary from policy issues and protectionism, to a lack of procedural clarity. Researching the root of the problem leads, in turn, to the development of knowledge from which further actions can be taken. That can lead to government-to-government lobbying, the involvement of chamber white papers, or the sudden realization that pending reform may unblock the problem. In short, strip down the block to the various component legal parts, examine each one for problems, identify where it truly lies, and either instigate or keep track of movements concerning a fix.
In the case of the bar, the problem remained that there was no law permitting foreign involvement in operating an F&B outlet. At the time, all bars and restaurants were housed in hotels and, in those days, only a select few hotels were even permitted to receive foreigners as guests. China also had restrictions in place concerning the use of RMB. Foreigners in China could only use foreign exchange certificates – a currency issued at RMB face value, but with a premium 20 percent surcharge on top when buying them. Use of these certificates was only permitted in restricted outlets, creating a system that meant foreigners were controlled in where they could go and spend money.
Lesson 2: Strip the problem down
Although there were no laws in place to support the foreign operations of a bar, it was useful to examine what laws did not exist, and what laws did. Clearly, China had laws in place for the operation of F&B outlets, it’s just that they were off limits to foreigners. So, what component parts of operating a bar needed to be understood in order to check off all the boxes? I decided to look into it and find out. In any industry, the operational aspects can be broken down into numerous issues.
- Getting a license – what is required?
- Staff employment in China – how to legally do that?
- Taxes and other financial issues.
- The supply chain, and so on.
But what it really all boils down to is what do the Chinese authorities want?
As has been mentioned many times in the recent historic and social developments within China, a major factor of Chinese society and government has been to maintain social order. Back in those days, China had an additional problem, the Tiananmen incident had only recently happened, FDI had all but dried up, and China was – the oil industry aside – being internationally treated as a pariah state. The country was desperate to pacify sentiment and attract foreign investment, as well as foreign talent and expertise.
In Shekou, faced with discontent from the foreign invested oil companies themselves about the facilities on offer to their expatriate staff, the local government came under pressure. A few brawls erupted in the streets as frustrated expats, denied booze and cigarettes while on the rigs for a month, found little to do and no supplies onshore either. An angry oilman is not a sight one wants to be faced with, and the local government (and the oil companies) were becoming concerned. But still, the legal issue of licensing remained, in addition to the lack of facilities. I was called into a meeting with CNOOC, the local public security bureau (PSB), China Merchants (who owned the land in the area) and representatives of the foreign invested oil companies, one or two of which were by now clients. At the time, I was the only foreign legally responsible person (the authority that predated the licensing of private practice lawyers, still some two years away) in the city. We all sat down to try and reach a compromise. I knew one could be reached when representatives of both CNOOC and the PSB said: “We’re not against you having a bar. We just need to work out how to do it.” It was back to those component parts of the law again.
Lesson 3: The law says you can’t do that, so what are the alternatives?
Problem 1: The license
Giving the bar a license was impossible as the law didn’t exist for one to be issued to foreigners. They could only be issued to Chinese. But – I suggested – what if we could set it up as a private club? There weren’t any laws that outlined such a structure, but on the other hand there weren’t any laws that prohibited it either. I’d actually taken the idea from the original operations of a similar situation that had solved a problem in Lagos, following conversations I had had with some of the previous African-based expats. A pathway appeared and there were nods of potential approval. If no laws existed for a private members club, none could be broken. I was onto something. The PSB official broke in, “That’s good. If it’s a members club, then members can be registered. If a list of the members can be given to the PSB, that satisfies our security concerns.” It meant they could still keep an eye on us – and China loves the concept of individual lists and registrations.
Problem 2: No license = no employees
Although the concept of a club seemed to have some merit, the problem of not being licensed remained. It meant – and still does today – that there was no legal structure with which to employ Chinese nationals. Chinese employees require welfare payments and insurance coverage and these need to be processed through a valid business license. The solution? Employ Filipinos! China, at the time, for reasons explained had a very loose immigration policy. Desperate to attract foreign investment and expertise, they turned a blind eye to expats coming in and working while on tourist visas; especially in Shekou which was a long way from Beijing and anyway cut off from the rest of China by the Shenzhen border. Gravely, we were told “You can’t employ any Chinese. But if you are willing to ‘manage’ it yourselves, we have no objections.” I was making progress here.
Problem 3: No license = no tax registration, no banking, no money
This was an issue that caused a lot of headaches. The club could not have a license, could not open a bank account, and could not register with the tax bureau. It was explained brusquely: “You cannot make any money.”
That was a problem as important stock items like beer and the not insignificant issue of rent needed to be paid for. I felt the government was pressing us to finance the entire thing ourselves. But after some debate, the solution proved easy, simple, and actually advantageous. Would we be allowed to receive money and just not make any? Discussions followed with the outcome being: “You cannot receive money from the sale of drinks.”
It seemed as if the concept was fading away again. But I hurriedly thought – in my previous experiences as an expat, most notably in Singapore at the prestigious Tanglin Club – members weren’t allowed to pay cash for their drinks either. They had to buy a book of chits (that system is operated in many private members clubs and continues at the Tanglin). The Chinese looked at each other. Conversation ensued. A long pause, and then, “We are of the opinion you may sell books of tickets. But you may not make any profit.”
It took me awhile for what he’d just said to sink in. And then it hit me: We could sell beer and drinks at cost. Our private members club would have the cheapest beer in town!
The reason that they didn’t want us to make any money was to evade any need for them to insist upon tax bureau registration. A deal was done internally, and China Merchants agreed to rent the ground floor of a villa property. RMB wasn’t acceptable, but naturally they would, under these special conditions, accept Hong Kong dollars.
I went back to a group of the more senior expats and let them know that we could do it, but under the following conditions:
- Members only. And they must be issued with membership cards with the details provided to the local PSB.
- No Chinese staff. But we can hire and pay foreigners on tourist visas on the quiet.
- Someone needs to put money through their private bank account (one was eventually opened in Hong Kong)
- We can’t make profit. But we can deduct overheads, and sell at cost. The cheapest beer in town!
A committee was formed to manage the affairs of the club, which was christened “The Snake Pit.” Shekou means “snake mouth” in Chinese, the peninsula is named for its shape, and the bar took that as inspiration. Two months later, the bar – the first in China to be under foreign management – was open. And that is how you can open a bar in China without any supporting laws. The cheapest beer in town has probably been my best contribution to expatriate life in China in the past 20 years.
Today, the Snake Pit has moved from its villa location, but it remains in Shekou. It is now also properly licensed, registered with the tax authorities, and today even employs Chinese staff and makes a small profit (which is donated to local charities). It is a legitimate business, still run by expats.
The lessons demonstrate that even without the apparent support of the law in China, solutions can be possible. The methods shown of breaking down the objections to laws, may still show the way ahead for certain foreign investors in the country, although experienced opinion should be sought on this. Chinese foreign investment law is an evolving animal – understanding that and working out how to deal with it remains the role of experienced China professionals, and one that can only be done with on-the-ground, practical knowledge, coupled with creativity and innovation.
Chris Devonshire-Ellis is the founding partner and principal of Dezan Shira & Associates, and established the firm in 1992. Since then, Dezan Shira & Associates has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States. Chris regularly contributes to China Briefing as well as our associated titles India Briefing and 2point6billion.com. The firm celebrates its 20th anniversary in November this year and will be hosting a series of commemorative events for clients and friends of the firm across China.
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