Embrace the strange

Fear of the unfamiliar is a pan-human survival instinct, and Chinese people are no exception. Indeed, Confucianism is almost entirely uninterested in foreign ideas or foreign peoples, focusing rather on the perfection of a Chinese social order derived from the past. Even invaders were incorporated into the Confucian cultural structure and converted, post-invasion, into “Chinese” dynasties.

Even in the face of demonstrated Western technological and economic superiority during the Qing dynasty, the reformers of that era nevertheless attempted to preserve an exceptional, and superior, space for Chinese culture: “Use the West for technology, but China for the essence.”

Chinese leaders still play on this sentiment today, but it is a tricky balancing act. China cannot allow its xenophobes to dictate policy so long as the economy booms. But if China experiences an economic correction – as it eventually must – the extremists will gain more leverage; thus the leadership has carved out a fallback position in the hills of ethnic nationalism.

Thus even as China’s economy integrates with the global system, some Chinese politicians still feel it necessary to take occasional, rhetorical swipes at foreign-ness, repeating the canard that China can adopt foreign technology while ignoring the ideas that built it.

Nevertheless, despite accusations to the contrary, the central government has so far done a relatively good job of allowing foreigners to conduct their business here. To attract foreign investment, the government created a de-facto tax haven for foreign companies and their foreign employees. This was self-interested, of course: Without tax breaks, the foreigners would not have come, and neither would their money or their intellectual property.

Penalty tax

But things are changing. In 2008, China eliminated most of the tax breaks for foreign firms. Now Beijing is targeting the paychecks of foreign workers.

On October 15, companies will be required to deduct an additional 11% from foreign employee’s salaries; employers will have to kick in another 37%. In exchange, foreign employees will get pension, unemployment and health insurance benefits that the majority of them are unlikely to use. The government also added (at the last minute) an exemption for employees from Hong Kong and Taiwan, sabotaging the government’s spin that the tax is intended to benefit, not penalize, foreign employees.

It must be noted that taxing people for services they don’t use is not unusual. The US and many European countries do it too. But in China, this tax is likely to produce unwanted results. While the percentages for Chinese and foreign workers are roughly the same, foreigners here tend to earn much more than their local peers; meaning the cost increase to employers will be higher.

If the rule is meant as a form of affirmative action to encourage companies to prefer local Chinese workers, it is completely unnecessary. Most multinational firms prefer to hire local residents anyway. They are cheaper, they are fluent in Chinese, and they are familiar with the culture; multinationals in China have been relentlessly localizing their workforces without any encouragement from Beijing.

Those foreigners who are still employed here earn a premium compared to their Chinese coworkers for a reason; they have skills the local market cannot provide. Conversely, foreign college graduates with no experience or particular skills are discovering that their market value has plummeted thanks to competition from bilingual locals.

Going outward

Given the need for Chinese firms to expand into overseas markets, now is the worst time to encourage local firms to keep their headcounts parochial. Foreign employees (including returnees with foreign passports) can make a critical difference as domestic companies navigate foreign cultures, attract foreign consumers and manage overseas subsidiaries. The same goes for foreign consultancies and law firms.

The last thing outward-looking Chinese private firms like Alibaba, Huawei, and Suntech need is encouragement to run multinational ventures from parochial headquarters. Chinese labor markets are working just fine; Chinese “essence” does not need policy protection; it’s time to embrace the strange.