Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: SATURDAY, December 10, 1994                   TAG: 9412130002
SECTION: BUSINESS                    PAGE: A8   EDITION: METRO 
SOURCE: ELAINE KURTENBACH ASSOCIATED PRESS
DATELINE: BEIJING                                 LENGTH: Medium

BUSINESS RISKY IN CHINA

Along with the welcome mat and warm handshakes, some unpleasant, often costly surprises await foreign firms that invest in China.

For McDonald's Corp., the unexpected came last month in what amounts to an eviction notice from city officials whom the company says promised a 20-year lease on Beijing's choicest street corner.

For Australian businessman James Peng, it was a kidnapping from the Portuguese colony of Macao and more than a year's detention in the southern city of Shenzhen before being tried on charges of corruption and embezzlement.

During the past three years, about 20 foreigners or Hong Kong Chinese have been illegally imprisoned in China following disputes with their Chinese business partners.

Consultants familiar with China say such misfortunes are not signs of a dramatic deterioration in the investment environment.

They are, however, reminders - along with inflation averaging more than 20 percent, skyrocketing wages, a credit crunch, bureaucratic hassles and distribution bottlenecks - that doing business in China can be perilous as well as profitable.

Many problems stem from vaguely worded laws whose interpretation seems to be arbitrarily suited to the moment.

McDonald's said it thought it had a firm legal right to spend 20 years at the intersection of Wangfujing Street and the Avenue of Eternal Peace - just down the street from Tiananmen Square - when it decided to build its outlet there.

The 28,000-square-foot, two-story restaurant is McDonald's largest in the world, and one of its most profitable.

But Beijing says the fast-food vendor, like many other retailers on the busy street, must make way for a huge commercial complex planned by Hong Kong developer Li Ka-shing.

``This is not going to scare away foreign investors, but it is likely to make foreign retailers more wary of their property exposure in China,'' says Bob Broadfoot, director of the Economic and Political Risk Consultancy in Hong Kong.

Of greater concern, Broadfoot says, are China's confusing tax laws.

China announced a 17 percent value-added tax in January, but exempted products made for export by foreign-funded firms. In August, it said it would end the exemption for foreign firms. The Ministry of Finance recently issued a special notice reassuring foreign investors that their tax burden would not rise. Few took comfort.

``We all have to look at the fine print on this one. We still don't know exactly where we stand,'' Broadfoot says.

Worrisome also are misunderstandings that arise because foreign partners fail to assess the potential human risks in their China ventures.

Several Western investment banks still are smarting after losing millions of dollars on copper trades by the Shanghai subsidiary of China's International Trade and Investment Corp. on the London Metals Exchange.