Chinese Shortcuts Getting Longer

Connections count in China, but even a $25,000 exclusive club membership can't buy guarantees for foreign dealmakers in the current political climate

By , Staff writer of The Christian Science Monitor

THE posh new Beijing Royal International Club is in the business of guangxi -- that is, connections.

For a $25,000 membership fee, dark-suited foreign executives rub elbows with China's corporate and political elite. A relatively minor investment, perhaps, if a political friend made here can clinch a multimillion-dollar contract or shepherd approval for a factory through the Byzantine bureaucracy.

But foreign wheeler-dealers -- and the club's Malaysian and Chinese owners -- are learning a hard lesson. They are discovering that even the high-priced grease of guangxi is an undependable lubricant in China's increasingly chaotic and shifting political structure.

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''We are facing a lot of problems from the [local] government side,'' says Tandy Chen, a Taiwanese who manages the club. To override municipal objections to renovating a former imperial villa, the club owners relied on their central government ties. Now, the club is beset by new licensing demands from miffed city officials.

''We used a secret channel to a senior government official, so the city government was not satisfied. That might not have been a proper decision,'' Mr. Chen says. Forced to halt construction of a new wing, angry Malaysian investors have put on hold planned investment in other clubs, property, airlines, and power plants.

Increasingly, foreign investors who once rushed into China and paid premiums for political connections are losing enthusiasm for a market where powerful patronage can cut both ways and outsiders fall victim to internal struggles and soured deals.

''The lemming instinct among investors has stopped. China is no longer a fashion,'' says an executive with an American bank. ''Investment is still coming in, but it's more guarded.''

Foreign investment is expected to drop this year as overseas companies become more cautious and the government moves to control foreign inflows and joint ventures -- which it blames for causing high inflation.

In 1994, foreign direct investment rose to $33.6 billion, up from $27.5 billion the year earlier. This year, government curbs on spending and real-estate speculation are projected to reduce direct foreign investment to $30 billion, the official China Daily Business Weekly reported last week. Consumer prices jumped to 24.2 percent from 14.7 percent in 1993. The government hopes to reduce inflation dramatically in 1995.

Part of what's unnerving investors is the political uncertainty over the leadership succession to ailing paramount leader Deng Xiaoping. Highlighting the power shift was February's spectacular downfall of the Zhou family, steel industrialists, allies of Mr. Deng and among China's highest-flying free marketeers.

Family patriarch Zhou Guanwu, who fought the Japanese alongside Deng in World War II, was forced to step down as head of Shougang Corporation, China's largest steelmaker. The enterprise was once cited by Deng as a model at the cutting edge of market-style reforms.

Zhou Beifang, Zhou Guanwu's son and former chief executive of Shougang's Hong Kong operations, was arrested for corruption amid reports that the firm was under investigation for buying a Peruvian iron mine and other offshore assets at premium prices.

Zhou's downfall left many investors probing for reasons. The ensuing speculation sent many prominent Chinese companies, known as red-chip stocks, tumbling on the Hong Kong Stock Exchange. Political pedigrees played an important role in winning many red-chips a listing on the exchange and thus foreign investor attention.

Speculation swirled that the financial debacle signaled a toughening anticorruption drive by the new Communist Party leadership, especially against children of senior leaders commonly known as princelings, closer regulation of companies, or the decline of Deng influence.

''People have paid a lot of money to court the princelings. Given the political risk now, they wonder if it will ever pay off,'' says a European businessman with close ties to Deng's children, who have extensive business interests.

The perils of dealing in China also include inadequate legal protections, trouble obtaining necessary approvals among competing government agencies, and failure to honor contracts. German, Japanese, and American banks have tried unsuccessfully to force Chinese companies to make good on loans. New York-based investment banker Lehman Bothers is involved in a legal morass to get Chinese companies to cover foreign-exchange losses.

China International Trust & Investment Corporation, the government's conduit for overseas investment and another showcase company, was reportedly planning a shakeup in top management after the firm became involved in a dispute over losses from trading metals futures abroad.

Even the powerful People's Liberation Army, which commands a vast business empire and has been sought after by many overseas companies, has a reputation for being the most capricious of Chinese investment partners.

A Russian architect who set up a hotel in partnership with a military-controlled company found his army connection eased many start-up problems. But when a dispute broke out over the hotel's management, the Army banished the Russian from the project. He had no recourse for regaining his investment other than the slow, politicized Chinese court system.

''It's the same old problem. The old culture could go on for another 25 years,'' says executive club manager Chen.

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