The Importance of Relationship Building in China

Although most Americans treat people they know differently from strangers, Chinese behavior toward insiders and outsiders tends to be more pronounced than in the United States—and therefore more consequential in negotiations in China than many Americans realize. Relationship building in China operates according to very different rules.

A guiding principle in Chinese society is guanxi: the cultivation of personal relationships with people who can be expected to exchange favors, loyalty, and support over time. Family ties are paramount, but friends, classmates, former colleagues, and neighbors can also be drawn into this inner circle.

As a foreigner, a savvy business negotiator can cultivate guanxi (关系) either by hiring people with close ties to her counterpart or by deliberately building her own long-term relationships with key contacts. In China, who you know—and how well you know them—often matters as much as what’s written in a contract (see also, How to Negotiate Better Business Deals).

The Chinese often go to considerable lengths to open doors for those within their social networks and to extend a level of trust that can surprise American negotiators. In research on pay-allocation decisions, Chinese participants treated insiders far more favorably than American participants did, according to findings by Michael Bond of the Chinese University of Hong Kong and Kwok Leung of City University of Hong Kong.

This emphasis on relationships is deeply rooted in Confucian values, which stress interpersonal obligations and social harmony. As a result, your Chinese counterparts may trust you to honor a deal not primarily because you signed a binding contract, but because guanxi obligates you to do so.

Relationship Building in Negotiation: The Reality of Negotiations in China

China’s legal system has strengthened over time, but relationships often continue to carry more weight than formal rules. Historically, inconsistent enforcement has meant that contracts alone may not provide sufficient protection—especially when government-owned or government-affiliated entities are involved.

In a study of arbitration in China, Randall Peerenboom of UCLA found that courts have sometimes failed to enforce awards against state-owned enterprises, many of which operate under direct or indirect government influence.

Similarly, in Mr. China: A Memoir (Collins, 2006), Tim Clissold, the British manager of a venture capital firm that bought and turned around Chinese businesses during the 1990s, describes his attempts to get the unscrupulous factory manager of a Chinese company to resign. The fact that Clissold’s company had a legal right to fire the manager was irrelevant; the manager, Shi, stayed put, and employees followed his orders, not those of the newly appointed boss (see also The Importance of a Relationship in Negotiation).

“As we drove into Zhongxi Village at dusk, with [the new manager] and his team,” Clissold writes, “we saw that Shi had gutted the factory … The entire management team had been ripped out and sent down the valley.”

The episode underscores a hard lesson for foreign negotiators: without guanxi, legal rights may offer limited leverage.

Relationship Building in Negotiation: The Risks of Guanxi

China’s legal and regulatory systems continue to evolve, but many negotiators still find that laws, contracts, and formal policies serve only as starting points rather than final safeguards. A contract might specify a price of 15 RMB per part, yet if a supplier later demands 20 RMB, enforcing the original terms can be difficult and costly.

For this reason, trust in your negotiating partner remains critical. Guanxi is essential for business negotiations in China—but relying on it carries risks.

To manage those risks, Eric Tsang of Wayne State University advises conducting periodic guanxi audits. The goal is to ensure your organization maintains multiple relationship ties with the other side. If your entire relationship depends on one individual, your deal could unravel if that person leaves or loses influence.

In addition:

• Recognize that your guanxi as an outsider may be outweighed by a better offer from an insider.
• Strengthen your BATNA (best alternative to a negotiated agreement) so you are not overly dependent on any single relationship.
• Remember that guanxi cuts both ways—your counterpart will expect favors and flexibility in return.

Handled wisely, guanxi can open doors and sustain agreements. Handled carelessly, it can expose you to unexpected obligations and risks.

What are your thoughts on relationship building with China? Leave us a comment.

Related Article: The Negotiation Process in China

Originally published in 2013.