Beware of hasty investment proposals - they may just be idle chit-chat

By Kathleen Lau

Last month I talked about the difficulty foreign business people have in distinguishing between a tall story and valuable advice from their Chinese associates. It is their lack of reference that makes them vulnerable to falling for something a local never would. In this article, we continue with a different topic than planned because of something that happened to me recently.

As I write this, I'm in Paris. I lived here for a few months in 1993, before setting foot in China. My identity then was that of an American Chinese. The French I met understood the American part - often challenging me on the history rock ‘n roll, or quizzing me on the stand of the current president (both of which they knew better than I). But no one quite knew what to do with the Chinese part. There were no handy questions as China was "un grand mystère".

Fast forward 14 years. Sitting at the crowded café at Bastille, I began talking to a group at the next table. My American friend drew "oohs" for her French and I drew "aahs" for living in Shanghai. No mystery this time. One of the women at the table came right to the point: "How about Chinese investors? I work in investment, maybe you can refer some to me?"

If this is what someone living 10,000 miles away thinks of China, what about us who live on the ground?

RMB signs in their eyes

Currently there is a mystique of the "rich Chinese". The profile of this mysterious group (which by the way does not yet have defined demographics) is usually a business owner who is not well educated and made his dazzling wealth in only the last 10-15 years. They are under 50, and are ready to spend, spend, spend. One urban legend has it that one rich Chinese bought 10 private jets. Another has it that there are more Rolls Royces per capita in Hangzhou than in Hong Kong. They are buying yachts that are bigger than can fit in any Chinese port. And so on.

We hear they have massive amounts of money to invest, but are lacking good ideas or good management in their empire. Enter the foreign executive working in China.

If you have a business card with a title hinting of a manager's role in a known company, sooner or later you will be approached by someone who wants to invest or knows of an investor. No matter if you're Head of Bottle Washers at the Ritz-Carlton, what matters is that if you're the Head, and working at the Ritz, you'll be offered a move.

Whether these "rich Chinese" exist or not, it doesn't matter - we think they do. As a result, some of us are particularly susceptible when someone says, "If you open your own business, any business, I'll invest." Or if we hear, "Run my business, and I'll make you a partner."

In your own country, few of us would ever hear such a vote of confidence on our ability from associates that we barely know. Yet here we are given these offers regularly in the most off-handed way.

Before signing on the dotted line

A friend has a booming business. In the throes of success he met "a rich investor". He knew of an available space in a prime location, along with a prime rent. Needing investors, he called on some of those who made such offers. "Get the deal, I'll invest," his white knight promised. A contract for the space at prime rates was signed. It was time to bring the investor in with the cash.

"Oh," the investor exclaimed in surprise, "the money I had put aside was just spent. I had a good deal on an apartment building; I didn't know you would sign so soon." Translation: I didn't know you would really get the deal.

With a deposit at stake, my friend called on all those who had offered to invest in the past but found no takers. He reneged on his lease, his hefty down payment, and the goodwill of a friend who made the deal possible.

Now, not everybody who says "I'll invest!" is leading you on or has malicious intent. But in these financially fluid times, "I'll invest!" can be translated to "Let's meet up sometime!" Take it for what it is - a throw-away comment.

Maybe you're thinking that my friend was silly not to have something in writing first. But here in China, businesses regularly open before the permit is approved. How can you tell which deal needs to be "by the book", and which can be fudged?

How well do you know me?

The answer is by working and getting the advice from associates you know well. While it is true that there are lots of project seekers with cash to spare, any savvy local can tell you that those investors would do a deal shrewdly and with care. Before you fantasise on what you could do with someone else's money, consider your partnerships as seriously as you would in your home country. Work on smaller deals first; spend more time researching their background and businesses. There are no shortcuts.

It is also tempting to think that a Chinese partner would take care of the local woes, leaving you to do what you know best. Many times, the local investor comes from a different industry. He thinks you're the one who know the ins and outs of your field. I know of more than one restaurant financed by locals and operated by foreigners that has run into regulation trouble because both sides thought the other knew more than they did. The permit never gets issued after massive money is spent on outfitting because the initial zoning wasn't checked carefully. Or if the permit does arrive, it comes only after a long delay and costly construction alterations.

I'll take care of you

In offers of making you a partner for turning around their company, it gets more dangerous. Here, you are giving your expertise, energy and earning power into someone else's business. Examples abound of international companies with iron-clad contracts getting burned. And those have an entire structure behind. How can you as an individual protect yourself against being used?

Put simply, you can't. However good your contract is, what can you do if the other side simply decides not to pay? You'll spend years in litigation while his business chugs along with all your know-how and you dry up your bank accounts paying your lawyers.

That doesn't mean you can't accept these deals. Most locals used to dealing with foreigners understand and respect the power of a good contract today. And if they consider you their friend, they won't nickel and dime you like some foreigners would.

By the way, locals do not have a monopoly on behaving badly these days. The promise of China's newfound riches have lured a new breed of foreigner to this land. These days, get–rich-quick schemes can come from foreigners as well as locals. Some of these foreigners, who would never violate a contract in their home country, are doing so quite recklessly in Shanghai. Foreigners working for foreigners - compatriots even - have found themselves not getting paid or having their agreements cast aside with a simple "I never agreed to that." Schemes like these are bad deals in any language. Don't lose your head - adhere to the same principles that are applied the world over. Get to know your associates first. There is no shortcut.

©copyright 2007 by Kathleen Lau. No part of this may be reprinted - in any language or format: printed, electronic or otherwise - without express written permission from author.