Why Western Companies Often Misunderstand China
China is now the world’s second-largest economy, a leading industrial nation and one of the most important destinations for international investment. At the same time, it remains one of the world’s most misunderstood business environments.
The explanation does not lie in a lack of information. On the contrary, countless analyses, reports and news articles about China are published every day. The real problem is that much of the information reaching Western businesses explains what is happening, but far less frequently why it is happening. Events are often analysed through Western economic, political and legal frameworks, despite the fact that China has developed within an entirely different historical, cultural and institutional context.
As a result, many companies interpret Chinese business decisions through assumptions that work well in Europe or North America but do not always lead to the correct conclusions in China. This applies to perceptions of the role of the state, access to capital, corporate governance, business relationships, contractual negotiations and corporate leadership. The outcome is often misunderstandings that could have been avoided had the parties possessed a deeper understanding of each other’s perspectives.
This does not mean that China is unpredictable or that it operates according to rules that cannot be understood. Quite the contrary. Chinese business culture is founded to a significant extent on logic, structure and long-term thinking. The difference is that its underlying logic often differs from that with which many Western companies are familiar.
This article is based on more than two decades of practical experience in Chinese and international business. That experience also formed the foundation of the book Is China in for a Hard or Soft Landing?, written by T. H. Svedlund, Lead Counsel at Forsety Legal. The book examines China’s economic development, business culture and investment environment from both a commercial and business law perspective, drawing upon practical experience gained from business establishments, investments, capital markets transactions and other cross-border transactions between China and the West.
We Often Judge China Through the Wrong Frame of Reference
One of the most common reasons why Western companies misunderstand China is that they unconsciously assume that the institutions which have shaped Europe and North America have also shaped China.
We assume that the role of the state should resemble the one we are accustomed to. We assume that capital markets operate in the same way. We assume that a signed agreement serves the same purpose and that business decisions are made through similar processes.
That is only natural. We all interpret the world through the lens of our own experience.
The problem arises when these assumptions become the benchmark against which we assess an economy that has evolved under entirely different historical conditions.
Over the past forty years, China has undergone one of the most significant economic transformations in modern history. Hundreds of millions of people have been lifted out of poverty, world-leading technology companies have emerged, and the country has developed highly sophisticated industrial value chains spanning everything from battery technology and semiconductors to artificial intelligence and biotechnology.
This transformation has not been achieved by copying Western models. Nor has it been achieved by rejecting them altogether.
Instead, China has gradually developed its own economic system in which the market economy, state planning and private entrepreneurship interact in a way that has no direct equivalent in the West. Anyone seeking to understand China solely by comparing it with Europe or the United States therefore risks overlooking the very mechanisms that have driven its development.
China Plans Differently
One of the clearest differences between China and many Western economies is its perception of time.
In Europe, economic policy is often shaped by recurring elections and changes of government. Political priorities shift, reforms are revisited, and investment decisions are sometimes influenced by relatively short electoral cycles. China operates differently.
The country’s economic development is guided to a large extent through national Five-Year Plans, which set the overall direction for industrial policy, technological development, research, education, energy, digitalisation and other strategic sectors.
These Five-Year Plans should not be confused with detailed state control of individual companies.
Rather, they serve as a strategic compass for the country’s long-term development. Businesses, investors, universities and local authorities are thereby given a clear indication of which sectors and technologies are expected to receive priority in the years ahead. This enables companies to make investment decisions with a significantly longer time horizon than is often possible in markets where political priorities may change following every election.
This does not mean that risks disappear. It means that the direction becomes clearer. That is a crucial distinction. Many Western companies sometimes interpret China’s long-term industrial policy as a form of state control. Our experience is that, in practice, it often serves as a means of reducing uncertainty by providing greater clarity about which sectors are likely to remain priorities over the long term.
This creates greater predictability for entrepreneurs, investors and financiers alike. The lesson that Western businesses can draw from this is not that they should seek to replicate China’s economic model. Rather, it is the importance of adopting a genuinely long-term strategy.
The most successful companies rarely build their businesses around the next quarterly report. Instead, they build them around the structural changes that will shape their markets over the coming decade. Perhaps that is the most important lesson of all. Many companies plan for next year.
The most successful plan for the next generation.
The State and the Market Are Not Opposing Forces
One of the most common misconceptions in the West is that the state and the market are fundamentally at odds with one another. The debate often centres on the extent to which the state should intervene in the economy and where the boundary between the public and private sectors ought to be drawn.
China approaches this question from a markedly different perspective.
Throughout more than twenty years of working with Chinese companies, we have repeatedly observed that the state and the private sector frequently work towards the same long-term objectives, albeit with different roles. The state sets the overall direction and creates the necessary conditions. Entrepreneurs build businesses, develop technology and compete in the marketplace.
For many Western companies, this represents an unfamiliar way of viewing the relationship between the public and private sectors.
This does not mean that competition is any less intense. Quite the contrary. Competition in the Chinese market is often among the fiercest in the world. The difference is that it takes place within a system in which the state actively seeks to create the long-term conditions necessary for development in sectors regarded as strategically important.
That is an important distinction.
Capital Is a Strategic Instrument
Many Western entrepreneurs regard raising capital as a means of financing the next stage of growth. In China, capital is often viewed as a strategic instrument for achieving national and industrial objectives.
During our years of working in China, we have regularly advised companies in which state-backed investment funds or local authorities have become minority investors. To many European businesses, this may appear unusual. In practice, however, the model shares many characteristics with the way a venture capital fund operates.
The public investor does not normally become involved in managing the company’s day-to-day operations. That responsibility remains with the entrepreneur and the management team. Instead, the investor contributes capital, industrial networks, government contacts, research partnerships and other resources that enable the company to expand more rapidly.
In many cases, public investment also serves as a mark of quality, making it easier for the company to attract additional private capital. It is therefore misleading to portray this model as being opposed to a market economy. Our experience is quite the opposite. Public investment often acts as a catalyst for private entrepreneurship.
The entrepreneur remains the principal driving force behind the company’s development.
The difference is that entrepreneurs often gain access to a broader ecosystem of finance, research capabilities and industrial resources than is typically available in many Western markets.
Innovation Does Not Emerge in Isolation
When Western media report on Chinese innovation, the focus is often placed on individual companies or spectacular technological breakthroughs.
That is understandable.
What receives far less attention, however, is the innovation ecosystem that has been built over several decades. Universities, research institutes, local authorities, investment funds, industrial parks and private companies frequently work far more closely together than many Western businesses expect.
The objective is not to replace the market. The objective is to shorten the journey from research to commercialisation. For entrepreneurs, this means there is often an ecosystem that facilitates the development of new products, the establishment of new businesses and access to both expertise and finance.
It is difficult to understand the rapid growth of many Chinese companies without understanding this broader framework.
Western Companies Often Underestimate the Importance of Relationships
Over the years, as we have assisted Western companies establishing operations in China, we have frequently observed the same pattern. Companies devote considerable effort to their business plans, contractual documentation and legal structures.
That is entirely natural.
What many underestimate, however, is the importance of the relationships between the people involved. In the West, we often draw a clear distinction between the business transaction and the relationship. In China, the two are far more closely interconnected. This does not mean that personal relationships replace legally binding agreements. It means that the relationship often forms the foundation upon which the agreement is built.
Trust is therefore established not merely through well-drafted documentation or professional presentations. It is built over time, through continuity and through a genuine commitment to developing a long-term partnership. This also explains why many Western companies are surprised when a Chinese counterparty wishes to continue discussing matters that they themselves consider already resolved.
From the Chinese perspective, the negotiation may form part of a longer process in which the relationship develops alongside the transaction. From the Western perspective, the same situation may appear as though the other party is changing its position. In reality, the parties are often working from two fundamentally different understandings of what a negotiation actually is.
Those who understand this distinction have already taken an important step towards understanding Chinese business culture.
When a Contract Does Not Mean the Same Thing
Perhaps nowhere is the difference between Western and Chinese business culture more apparent than in their respective approaches to commercial contracts. Many Western companies regard the contract as the final stage of a negotiation. Once the agreement has been signed, the terms have been settled. From that point onwards, the business relationship is centred on fulfilling the obligations that the parties have agreed upon. If one party departs from the agreed terms, issues such as breach of contract, damages or other legal remedies naturally arise.
This logic is deeply embedded in Western contract law.
In China, one often encounters a different perspective.
This does not mean that contracts lack legal significance or that Chinese companies do not respect contractual obligations. That perception is both oversimplified and inaccurate.
The difference lies instead in how the contract itself is viewed. Many Chinese companies regard the contract as the formal foundation of a business relationship rather than the definitive solution to every future situation.
Business conditions change, markets evolve, commodity prices fluctuate, regulatory frameworks change, technology advances. Against that background, it may seem entirely natural that the contract should also evolve. It is therefore not uncommon for a Chinese counterparty to seek to discuss amendments to an agreement shortly after it has been signed.
Our experience is that the Western party is often surprised. The Chinese party is frequently just as surprised that the other side is unwilling to discuss the matter.
Quite simply, the parties are working from different assumptions about what the contract represents.
Do Not Begin with the Law
When a Western company believes that its counterparty is departing from the agreed terms, the instinctive reaction is often to refer to the wording of the contract. From a legal perspective, that may well be correct. From a commercial perspective, however, it is not always the most effective course of action.
Our experience is that, in many situations, it is far wiser first to understand why the counterparty wishes to alter the agreement.
Has the market or cost structure changed? Have new regulatory requirements emerged, or has an unforeseen circumstance arisen that neither party could reasonably have anticipated when the agreement was concluded?
This does not mean that every request for renegotiation should be accepted. It means that the underlying issue should first be understood before discussing the solution. In many cases, this approach produces a significantly better outcome than immediately characterising the situation as a breach of contract.
Over the years, we have seen many business relationships preserved through dialogue.
We have also seen business relationships break down because one party moved too quickly to turn what was fundamentally a commercial issue into a legal dispute.
That is an important distinction. The law should protect the business, but not unnecessarily destroy it.
Consensus Does Not Look the Same
Another difference that often puzzles Western companies is the way decisions are actually made. Many Western organisations place a high value on clarity. Questions are answered with either yes or no.
Decisions are documented and meetings conclude with everyone confirming what has been agreed.
In China, the process often works differently.
A meeting is not always intended to produce a decision. More often, it is an opportunity to understand the other party’s position, identify concerns and create the conditions for a future decision. This means that the question many Western negotiators naturally ask at the end of a meeting:
“Are we in agreement?” is not always particularly meaningful.
In many Chinese business settings, consensus is not expressed through an explicit “yes”. Instead, it is communicated through other signals such as who attends the next meeting, and has the discussion progressed to practical implementation.
Have the objections changed, has the tone of the discussions evolved, and have additional decision-makers become involved? Those expecting a clear affirmative answer may therefore fail to recognise that the process is, in fact, moving forward. , Equally, a polite “yes” may sometimes mean something quite different from what a Western business partner assumes.
Saving Face Still Matters
Another cultural aspect that is frequently underestimated is the importance of allowing people to save face.
This is not about pride, it is about relationships.
Publicly criticising a counterparty, questioning a decision-maker’s competence, or placing someone in a position where they are forced to admit a mistake in front of others may have consequences far greater than the issue under discussion.
This does not mean that problems cannot be addressed.
Quite the contrary.
However, the manner in which they are discussed often matters far more than many Western companies appreciate. We have repeatedly seen disputes resolved because the parties were given the opportunity to find a mutually acceptable way forward without either side appearing to have lost.
In the West, such solutions are sometimes regarded as compromises. In China, they are often viewed as a means of preserving the relationship and allowing everyone involved to save face.
The Law Is Only One Part of the Business Relationship
An experienced international adviser learns over time that the very same legal document may function quite differently depending upon the business culture in which it is used. That is why international business cannot be reduced simply to questions of governing law or dispute resolution clauses.
The law is, of course, essential. However, it always operates alongside culture, history and human behaviour. Only when these perspectives are understood together does a contract fulfil the purpose the parties originally intended.
It is also why companies that succeed in China have almost always learned something that cannot be found within the four corners of the agreement.
China Does Not Need to Be Copied. It Needs to Be Understood.
After more than twenty years of working with Chinese and international companies, we have frequently been asked the same question:
“What is the secret behind China’s economic development?”
It is an understandable question. At the same time, it is based on the assumption that there is a single explanation. Our experience is that there is not. China’s development cannot be explained solely by state planning. Nor can it be explained by inexpensive labour, technological innovation or entrepreneurship alone. Rather, it has emerged through the interaction of multiple factors.
A long-term national strategy, an exceptional willingness to invest, and an innovation ecosystem in which universities, businesses, capital and public authorities work together. A culture in which education, discipline and long-term relationships continue to occupy a prominent position. And, perhaps most importantly, a generation of entrepreneurs who, over the course of just a few decades, have built companies at a pace rarely witnessed elsewhere in the world.
It is the combination of these factors that makes China difficult to understand solely through Western frames of reference.
Misunderstandings Cost More Than Legal Mistakes
During our years in China, we have seen many international transactions that never came to fruition. Rarely because the parties disagreed over price, or because the legal issues were too complex.
Far more often because the parties misunderstood one another. The Western party perceived the Chinese counterparty as vague. The Chinese party perceived the Western counterparty as unnecessarily rigid.
Both parties were acting rationally.
The problem was that they were doing so from different frames of reference. International business is therefore not merely about translating languages, it is about translating ways of thinking.
Those who succeed in doing so build not only better businesses. They also build stronger relationships.
Tomorrow’s Companies Are International from the Outset
Another lesson we have learned over the years is that the distinction between domestic and international businesses is gradually disappearing. Today, even relatively small technology companies work with international suppliers, global investors, intellectual property spanning multiple jurisdictions, and customers across different continents.
As a result, cultural understanding is no longer something relevant only to large multinational corporations. It has become a competitive advantage for entrepreneurial businesses of every size. Companies that develop international expertise, professional corporate governance and an understanding of different business cultures from an early stage will enjoy a significant advantage as they enter their next phase of growth.
Understanding Creates Better Business
There is a tendency to describe international business as a matter of law, finance or strategy. In reality, it is just as much about people as it is about trust, and the ability to understand why the other party makes the decisions it does. This applies not only to China, but to international business generally.
Perhaps nowhere, however, do these differences become more apparent than in China, where the institutional and cultural distinctions are particularly pronounced. Our experience is that the most successful companies are not those that attempt to make Chinese businesses operate more like Western ones.
Nor are they those that seek to imitate the Chinese model uncritically. The most successful companies are those that understand both worlds. They know when to remain true to their own principles, and when they need to adapt the way they communicate, negotiate or build relationships. That is where genuine international business expertise begins.
How Can Forsety Legal Help?
Doing business between Europe and China requires considerably more than an understanding of two different legal systems. It requires an appreciation of how law, business culture, capital markets and commercial interests interact in practice.
For more than twenty years, Forsety Legal has advised both European companies establishing operations in China and Chinese companies investing, expanding and undertaking acquisitions, capital raisings, IPOs, reverse takeovers (RTOs) and other cross-border transactions.
That experience enables us to provide advice based on transactions that have been successfully executed in practice rather than on theoretical models. We assist companies in structuring investments, market entries, joint ventures, acquisitions and international collaborations, combining legal excellence with commercial understanding and cultural insight.
Our advice is designed to understand legal risk, and to create the conditions necessary for successful long-term business relationships.
Further Reading
The topics discussed in this article are explored in greater depth in the book Is China in for a Hard or Soft Landing?, written by T. H. Svedlund, Lead Counsel at Forsety Legal.
The book is based on more than two decades of practical experience advising Chinese and international businesses. It examines China’s economic development, entrepreneurship, business culture, capital markets, international investment and the interaction between law, business and the state. Its purpose is to provide entrepreneurs, investors and business leaders with a deeper commercial understanding of China and the opportunities and challenges that arise when operating across different legal systems and business cultures.
