Explaining Guanxi

The Chinese Business Network

Ying Lun So, Anthony Walker

• Publisher: Routledge
• Year: 2013
• Print ISBN: 9780415384179
• eBook ISBN: 9781134223190
• Topic: Commerce
• Subtopic: Commerce Général

Guanxi, a system of Chinese business relationships, is often described, but is rarely fully understood. Though it seems intangible, there is no doubt that it has contributed significantly to the success of Chinese entrepreneurs and the places where they work. Translated loosely as 'personal ties', this simple explanation belies a complex and nuanced system. Guanxi has often been criticised as nepotism - unfair, inefficient, even corrupt, and generally detrimental to business and economic growth… but if it is that bad, how does it survive?

This insightful book unravels the origins of Guanxi and provides a much-needed explanation of the phenomena. It investigates:

• why it was initiated and developed
• what function it serves
• how it is maintained
• why it is such a dominant phenomenon in Chinese business life

Combining economics, law and culture, this clear and concise book looks to the future of Guanxi based on its history. Drawing on cultural, organizational and economic studies, it takes a multi-disciplinary approach, integrating these various topics into a coherent explanation of Guanxi ensuring that this illuminating book will be equally useful to students of Asian business as to practitioners working within this market.

1 What is guanxi?

Guanxi introduced

Guanxi can be roughly translated as personal ties but the simplicity of the phrase does little justice to the set of meanings and nuances invoked by the word. It has often been seen as a mysterious, yet vital, ingredient in successful Chinese business activities wherever they are carried out. There may be variations in its emphasis among Chinese in different parts of the world but, once understood, its distinctive nature compared to the way business is done among non-Chinese becomes clear.

The significance of guanxi is felt not only by businessmen but has also been recognized more formally by academics. Capitalism in Taiwan has been called ‘guanxi capitalism’ (Hamilton, 1989). A survey in the Peoples’ Republic of China (PRC) found that over 42 per cent of respondents regarded guanxi as very important in socio-economic life, while nearly 50 per cent regarded it as either important or somewhat important (Chu and Ju, 1990). It has also been found that the more successful Chinese businessmen in a city in the Philippines used more social connections in their business than did the less successful ones (Omohundro, 1983). No overseas businessman working in the PRC or the other major Chinese business communities of Hong Kong and Taiwan can fail to become familiar with the term guanxi but few will understand it. Whilst it will seem intangible, there is no doubt that it has contributed significantly to the success of Chinese entrepreneurs and the places where they work.

Whilst there is wide recognition of the importance of guanxi among both businessmen and academics, no explanation has been put forward of why guanxi was initiated and developed, what function it serves, how it is maintained and why it is a phenomenon peculiar to Chinese businessmen. An explanation and understanding of guanxi is necessary, not only as an aid to overseas (and Chinese) businessmen operating in Chinese business communities, but also for its impact on the wider economic field.

There has been much talk about Asian values in recent years. Before the Asian financial crisis in 1997, Asian values had been cited by some, especially politicians, as being responsible for the ‘economic miracles’ enjoyed by the dragon and tiger economies of Asia Pacific. Since the Asian financial crisis, Asian values have been blamed for contributing to the crisis. No matter whether one agrees with either of these views, there is no doubt that increasing attention has been paid to the role of cultural values in economic success. The importance placed on personal ties constitutes one of the most important building blocks of the so-called Asian values.

An important issue arising from these views is to what extent the developing Asian economies should imitate the developed economies in the West. The mystique inherent in the word guanxi can conjure a commonplace but invalid assumption that the use of personal ties in business is a uniquely Chinese or Asian phenomenon, particularly amongst business visitors to Asia. But, of course, there is a similar emphasis on personal ties in other cultures. In the well-developed market economies of the West, personal ties play a powerful role. Every business relies to a greater or lesser extent on relationships and contacts to ease the business process. However, guanxi functions in uniquely Chinese ways and is entrenched and orchestrated to a degree not remotely approached by business relationship systems in other cultures. The significant distinguishing feature of guanxi is that fundamentally it is a method of economic organization without resorting to law or other formal rules. Business relationships in other cultures do not have the force of such a basis to sustain them. Before trying to explain and understand guanxi more fully, a review of what is currently known is needed. Whilst guanxi has become the word that epitomizes the trading style of the Chinese, what exactly is it? A good first insight is given by Edith Terry (1984):

China is a world where what counts is not only whom one knows, but also who owes whom a favour.

Business relationships

China and the West compared

Business relationships in Western economies oil the wheels of business; they are not a method of economic organization or a substitute for commercial law. In Chinese society guanxi serves all these purposes.

In the West business relationships are based on a business culture and can be personal or purely pragmatic (utilitarian). Other relationships e.g. social, family, have their own culture.

But guanxi is the totality of any relationship; it is indivisible, pragmatic, or personal and pragmatic, but essentially utilitarian.

The simple translation of the Chinese word guanxi is ‘relationship’. The same word can be used either to refer to people, when the word means human relationship, or non-human issues, e.g. guanxi between price and quantity demanded. However, when the word appears in English and spelt as guanxi based on Peking’s pin-yin system,¹ it refers only to relationships between people.

Guanxi can be characterized as being personal, as representing the totality of a relationship between two business partners and as being mainly utilitarian in nature. An examination of the many descriptions of guanxi illustrates how writers have struggled to put into words the nature of the personal relationships represented by guanxi. For example: ‘Chinese particularistic ties’ (Jacobs, 1982), ‘personal ties’ (Pye, 1992) and as ‘necessitating very personal interactions’ (Leung et al., 1993).

However, a one line definition for guanxi is misleading because the very reason the Chinese word guanxi is used in English text, instead of saying ‘particularistic ties’, is because a simple English translation is insufficient to bring out the special nature of guanxi. Scholars have worked hard at giving texture to its meaning. Examples are:

It seems to me that either ‘particularistic ties’ or ‘personal network’ does carry the meaning of kuan-his [guanxi], but neither fully grasps the complicated and rich meaning of the word.

(King, 1991)

And after studying human relationships in the Chinese village of Fengjia, Kipnis (1997) noted that ‘the production of guanxi simultaneously creates human feeling and material obligation … In guanxi, feeling and instrumentality are a totality.’

A top Chinese executive in one of Hong Kong’s largest companies said one of the primary differences in the Chinese and Western ways of doing business could be traced to the fact that in the West business developed its own culture separate from private or personal culture, with a different set of rules and a character of its own. In the Chinese context there is no separate morality for business. There are no separate rules that divide the conduct of business from that of personal affairs, in which the key factor is proper human relations. A successful business relationship between Chinese companies begins with the establishment of a personal bond between the principal managers of the companies and is based thereafter on the careful maintenance of these personal ties (De Mente, 1992).

It seems that the Chinese are not used to compartmentalizing the different roles that they have with others and so treat the other person according to the requirement of the current role. For example, it is difficult for them to say that ‘being my teacher, I should be respectful to you, but now that you are my customer, I have to stick to the normal terms of trade’. This characteristic is indirectly confirmed by the fact that ‘some businessmen in the olden times were inclined to leave their hometowns to do business far away. This was to ensure that business could be conducted according to market principles, freeing the parties from interference by the particularistic pressures of guanxi’ (Skinner, 1971).

An inability to separate different roles has also led to the common saying of junzhi zi jiao dan ru shui (friendship between gentlemen is as plain as water). That is, in order to avoid the mutual obligations involved in guanxi, gentlemen would rather not develop any close guanxi because it is not possible to behave in very different ways when acting in different roles in relation to the same person.

Guanxi therefore has the characteristic of being personalistic or particularistic. It is a connection between people, not firms. Even if an individual is running a number of separate companies, the counter-party considers himself as still trading with the same entity, the person with whom he has guanxi. He could not have different relationships with each company.

As guanxi is personal in nature; it easily gives the impression that the bond is mainly emotional and affective. However, while affection might be present, because guanxi lumps together the different roles that one has with another, it seems that guanxi is primarily utilitarian in nature. For example, Walder (1986) characterized guanxi as ‘instrumental-personal ties’. A Chinese businessman has been quoted as saying ‘I know that when I retire – no more parties. You know, people are very pragmatic … Hong Kong’s memory is short’ (Redding, 1990).

Redding went on to highlight the utilitarian nature of guanxi as an ‘instrumental view of relationships, the opportunistic “using” of other people, [which] is likely to lead to friction only when one of the partners is naïve, and the naïve does not survive in this environment’. That is, if you cannot do anything for me, I will not do anything for you. Such an instrumentalist view of guanxi is echoed by other writers, including Yang (1994). For example, when comparing different types of relationship in China, she noted that guanxi was high on the ‘gain-and-loss’ calculation and low on emotional affect.

There are, however, some studies which claim that the closeness of the guanxi depends on ganqing (loosely translated as emotional affect). If this is the case, then it will contradict the characterization of guanxi as utilitarian. For example, Silin (1972) noted:

When trading relationships exist between two people not linked by traditionally sanctioned solidarities, the individuals concerned simply claim to share kan-ch’ing [ganqing] or rapport … Bonds of kan-ch’ing [ganqing] invest any association with flexibility and confidence … People rarely speak of having confidence in each other; instead they stress the degree of intimacy and warmth between them, the sate of their kanch’ing [ganqing].

Jacobs (1982) also used the term ganqing to denote the closeness of guanxi. But is it really emotional affection that those interviewed by Silin or Jacobs were referring to when they talked about ganqing as the bond between business partners? One interviewee was quoted as saying. ‘Of course one can use ganqing. If ganqing can’t be used, it isn’t ganqing!’ (Jacobs, 1982). What is clear is that for this interviewee ganqing was rather utilitarian. In fact, those conducting business negotiations often use words hinting at the affective aspects of the relationship. However, those using such words may not genuinely mean what they say. In fact, very often, when deep and genuine feeling exists between the two parties, there will be less explicit reference to the affective aspects of the relationship and bargaining will not be, or at least not explicitly, conducted.

Hence, guanxi represents the totality of the relationship between two persons. It is impossible to differentiate the affective aspect of friendship between two individuals and the utilitarian aspects of the business relationship. When one aspect ends, so will the other.

Business relations in the West

In Chinese societies personal relations dominate and are not usually separated from business relationships. Business relations in the West are more technical and company orientated with early recognition of the possible need for contractual formality as illustrated by this extract:

In business markets, relationships form the backbone of key supplier agreements for larger companies. Where a big company requires a regular delivery of parts or goods for its production processes, it does not just look at the quality of goods or materials to be bought. In these key supplier deals, elements such as delivery flexibility, lead time and technical support are essential to the smooth flow of products through the production cycle. In addition there are normally technology tie-ins the form of machinery, computer software and systems and shared intellectual property (both formal and informal shared knowledge that comes from working together over time).

The importance of quality of supply and lon...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Preface
• Acknowledgements
• 1. What is guanxi?
• 2. Explaining guanxi
• 3. Analysing guanxi
• 4. The influence of Chinese culture
• 5. The influence of law in imperial China
• 6. The rationality of the traditional Chinese legal and cultural systems
• 7. The future of guanxi
• Notes
• Bibliography
• Index