From Dragon Exports’ The China Report:

Counterfeiting, defrauding, and dishonest websites are becoming an increasingly rampant problem on Chinese search engine result pages. Through recent investigations conducted by Chinese authorities, a number of Chinese websites were found to be promising 800% returns on investments, but simply taking the money and running once bank transfers were complete. Numerous investors have reported significant losses stemming from such schemes, and China’s legislature is currently considering regulations to standardize online markets. For now, we recommend using only websites you’ve heard of!

A large variety of factors has led to the current lack of effective regulation in some Chinese industries. Below are some reasons why the Chinese market has become the way it is.

“Guanxi” in China is, as you may know, embedded in almost every facet of daily life here. When you buy a car, or a home, or often even dinner at a restaurant, it’s far more cost-effective if you have a “friend” in the company who can talk to another friend who knows someone else who can lower your purchase price. It’s all about finding someone to break you a deal, and of course with the understanding you’ll return the favor one day. In this respect, the Chinese marketplace is extraordinarily regimented: if you don’t return a favor, you really don’t know how many other people are going to hear about it, and thus not help you in the future. Once you play the game, you’re stuck in it.

So what does guanxi have to do with fraudsters on the Internet? Well, consider the situation. A group of unsavory fellows decide they have the perfect plan to get rich quick, and open a website that is going to trick people into sending them money. When they open the site, however, there are ID checks performed by the webmaster (these are government-ordered for anyone running a website), so guess who you need to bring into your scheme if you want to pull it off? The webmaster, and maybe his boss too. If a scheme is going to rake in enough money, it’s quite easy to understand how, in such a society, this sort of criminal activity might perpetuate.

Another reason for the lack of control is of course the speed at which Chinese society is changing. Every single aspect of the economy is exploding, and it’s hard to keep tight grip on a tether being pulled in 10,000 directions at once. In addition, consider the older generations in China, who were not born into a capitalist economy. In the past (i.e. before 1978) when the government announced it would do something, it usually happened (whether that’s a good thing or not is something we can debate another time!). So now, when an older Chinese citizen sees an advertisement on the Internet, it is more than likely he is going to be rather naive in his financial decisions — after all, no one owned cash in the past. These people will unfortunately learn how to survive in a semi-capitalist society the hard way.

As China’s economy matures, these growing pains will likely dissipate to some degree, though there isn’t a place on earth where you can trust everyone. A market thrives when people act responsibly and smartly with their money, and that’s the route China is on. While guanxi remains an issue, in the end it is not the most efficient way to do business. So long as the government continues to relax control of the economy, the problems with corruption and relationships will ease as well.

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The Dragon Exports Team