Australia: Worlds apart: The importance of understanding culture in doing business successfully in and with China

The Australia-China economic relationship continues to break new ground. The annual value of Australia's goods and services exports to China is $108 billion, which is 6.7 times that to Japan. China is Australia's largest export market (for both goods and services), accounting for nearly a third of total exports. Chinese investment in Australia has risen from $3 billion ten years ago to around $32 billion today, but this still only accounts for 1.3% of total foreign investment in Australia. China's impact on Australia in terms of trade and investment is set to grow now that Australia and China have signed a Declaration of Intent formalising the conclusion of the China-Australia Free Trade Agreement negotiations.

With China's middle-class expected to reach some 800 million people by 2030, China is eager to find ways to increase output from its key trading partners, including Australia. This will inevitably lead to greater Chinese investment in Australia as China seeks to increase the size of the pie. To date, Chinese investment in Australia has largely been concentrated in the resources sector. We can expect to see greater diversification of Chinese investment in Australia into other sectors, including construction and infrastructure. This is evident in China Communication Construction Company Limited's (CCCI) recent acquisition of John Holland Group – a strategic move aimed at building CCCI's global transportation infrastructure business.

However, there is widespread concern that commercial relationships between Australia and China have a high risk of failure as a consequence of different ways of doing business. Indeed, there are major cultural differences which arise from varying world views and experiences. Chinese cultural perspectives have developed through ultra-rapid modernisation layered over thousands of years of Daoist (Taoist) and Confucian tradition. Australian cultural perspectives have been shaped largely by the Western post-Enlightenment preference for reason, logic and law. Consequently, there are key distinctions in the way Chinese business people think and do business which Australian business people need to understand.

Impact of China's situational ethics on business

The Chinese preference for, and use of, situational ethics is a product of China's past, when individuals did not have absolute rights that were protected either by law or even by custom. Throughout Chinese history, individuals were subject to the arbitrary rule of their superiors, who included family members and government officials at all levels. As a result, Chinese business people often tend to focus less on logic, law and reason than on how a particular evolving situation may impact on a key relationship and on their position in that relationship. A core concern is how a situation can be used to further develop the relationship, how to reveal a current situation in a way that would be perceived favourably by others in the relationship. Western business people, however, tend to believe that if logic, reason and sincerity can not prevail, then surely the law will step in to resolve a situation.

Western business people tend to develop plans and implement them through forming agreements with business partners. Chinese business people tend to view plans and contracts as merely a snapshot in time – a prelude to future negotiations which may arise as a result of a change in situation. For Chinese business people, the details of business plans and the terms of contracts are simply guidelines which take on a secondary importance to the relationship and which may or may not be followed, depending on what is required for the relationship to continue to benefit them. That said, a good contract could be all you have to protect you should a relationship with a Chinese business partner unravel.

Need to consider harmony and 'face' and cultivate social reciprocity

China has an ancient authoritarian culture. For millennia power has been centralized and, since Confucian times, the primary moral imperative has been the obligation of loyalty to those within one's 'in-group'. Outside the in-group, there are decreasing levels of ethical responsibility and little (or no) moral obligation is felt towards others. Coupled with a fear of power and the inability to rely on a stable and independent legal system, this situation has given rise to an inherently dangerous and uncertain social structure. Refuge is sought in one's network of relationships of trust and, ideally, securing the favour of those in the relationship, especially those in power positions.

Chinese relationships of trust often take years – if not generations – to form and are held together by a concern for 'face' (one's image in the eyes of others - mianzi), social reciprocity (bao) and human feeling (renqing). This underpins the Chinese tendency to avoid confrontation and to communicate indirectly in a business context, in a manner which would appear to be "beating around the bush" to most Western business people.

It also explains the Chinese art of gift-giving. Gifts are given to give 'face' (i.e., to show respect and admiration) to the recipient to and increase the 'face' (i.e., raise the status) of the giver. Giving a gift is an act of friendship. It is a manifestation of human feeling (renqing). It is also a means of establishing trust. 'Face' and the desire to enhance the giver's position in a social network, is central to the ritual. If the recipient accepts the gift, he is agreeing to a reciprocal obligation, which also enhances the giver's status and power. In this way, reciprocity cultivates the self by defining the self in relation to the other, thereby building trust, cooperation and caring. Chinese gift-giving is, as experts have described, an art, bringing moral and cultural imperatives into the pursuit of social and instrumental ends.

Western business people's perspectives of gift-giving are substantially determined by Western laws and corporate rules. Chinese views, however, are determined primarily by a complex and sophisticated social philosophy of relationships. This also extends to reciprocal favours. If a Chinese business person helps somebody out, they expect to be repaid at some point. To those in the West, where you can secure a deal through formal meetings even if you do not know someone, this can reek of a "you scratch my back and I'll scratch yours" way of doing business and can seem improper. But in the Chinese context, this process makes moral and cultural sense. It is how business is done. To many Western participants in the Chinese market, the process is at best an annoying greasing of the wheels of business. At worst, it is a bribe.

In a socio-political environment where ties of reciprocity, not trust in shared values and a reliable legal system, are fundamental to social order, winning and maintain the favour of others, especially those who exert power, is key. It has also engendered a culture of corruption, with which Western business people need to be very careful.

Rule of people, not rule of law

As alluded to above, China is a country ruled by people and not by law. This means that Australian business people who are looking to do business in China need to align their business objectives with targets and policies set by the Chinese central, provincial and/or local governments. They also need to work to develop relationships of trust with key governmental agencies and officials affecting their business in China. For Australian business people doing business with Chinese partners in Australia, they need to work hard to explain the differing roles of government in Australia and on the relationship between governmental power, policies and the law in Australia.

Summary of key cultural differences affecting business with China

The above discussion is a very brief introduction to some of the main cultural challenges facing Australian business people who are doing business in or with China. Set out below is a table that aims to summarize some of the key differences in how business is done in Australia and China.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.