One small step on to wrong side of the law: Kevin Hamlin in Hong Kong relays travellers' tales of arbitrary justice and red tape nightmares in China

AN AMERICAN businessman, Philip Cheng Hui-ho, was looking forward to a relaxing evening in his hotel in Changsha, in the central Hunan province, after a meeting with his former general manager, Shen Xiaoguan. Instead he began a seven-month detention in China, engineered by officials adept at undermining Chinese laws.

At the meeting last August, Mr Shen had demanded urgent repayment of his dollars 165,000 ( pounds 110,000)investment in Mr Cheng's Zhuhai Bicycle Helmet factory. Mr Shen gave Mr Cheng the impression that he was under pressure to recover the money.

Although stressing the difficulty of raising money at short notice, Mr Cheng had promised to oblige, saying he would 'as a friend maybe give some personal money'.

An hour later, eight uniformed court officials barged into Mr Cheng's room, accused him of breaking a contract to repay money owed to Mr Shen, and said he was being detained. Four guards kept him in the hotel room for three days.

A week later Mr Cheng's US passport was confiscated by a Changsha court, which said that until the case was settled he must remain in Zhuhai, the coastal Special Economic Zone where the factory was located. Although foreign lawyers said his detention was illegal, it was seven months before a higher court overruled the Changsha court. Mr Cheng's passport was eventually returned last month and he left China 10 days ago.

While this is an extreme example of the arbitrary nature of law enforcement in China, such cases surprise few people used to doing business in China. Many say privately that it is essential to pay bribes, and warn that you never know 'when your friend will become your enemy'.

There are a number of horror stories. It took more than four years and cost pounds 225,000 for a Hong Kong businessman, Choi Chi- Ming, to extricate himself from false charges of gold smuggling in Wuhan, a city in central China, early in 1989.

To start with, the assistant managing director of Mr Choi's leather products company paid a pounds 36,000 bribe to Wuhan Public Security Bureau (PSB) officials in an act of desperation. But the PSB later demanded a further pounds 67,000. Mr Choi countered by demanding repayment of the original bribe and calling for charges against Wuhan PSB. Last July the People's Supreme Court in Peking found Mr Choi innocent, and returned his travel documents.

Mainland law enforcement officers usually treat Caucasians with more respect than overseas Chinese. None the less, traps await unprepared Westerners. In a recent case handled by Kroll Associates Asia, the US-based corporate intelligence agency, a British company learned some tough lessons about China.

Its hasty decision to provide advanced technology for a printing joint venture ran into problems straight away. When the technology was introduced, it was immediately copied by an affiliated factory in Shenzhen without permission. Patent and copyright infringements are among the main problems that foreign business people come up against in China.

Steve Vickers, head of Kroll's Hong Kong office, said: 'You'd be amazed at the number of companies with household names that just don't do their homework. Really huge names come to see me and say, 'Hey, we're in with the mayor of so and so.' We do a few checks and he's really the mayor's brother, or cousin.' '

If the British company had spent a short time investigating its Chinese partner, it would have realised it was incapable of delivering what had been promised, Mr Vickers said.

Even routine business transactions can present problems in China. Chinese banks are sometimes particularly difficult. When the government cracked down on surging bank credit last year, some foreign companies found their letters of credit (LCs) were not being paid. Most were signed by bankers in rural branches that had exceeded their issuing authority. 'If a branch manager is authorised to issue LCs up to, say, dollars 5m ( pounds 3.4m) and he issued dollars 10m, usually it will be paid,' said David Vong, a lawyer in Hong Kong with the American law firm Winthrop Stimpson Putnam and Roberts. 'But the credit crunch meant problems, because the bank did not have the money to pay it.'

The banks' headquarters typically argue that the LCs were issued without authority and are invalid. As their credibility hangs on the outcome of these cases, Mr Vong believes most banks will pay - eventually. But where large-value LCs have been issued by rural offices, Chinese banks may argue that it is incumbent on foreign companies to confirm their validity.

A typing error on LC documentation has delayed payments due to John Royce & Sons, a New York-based manufacturer of cable insulation, for up to three months. 'You are at the mercy of the opening bank in China,' said Bill Dvoretsky, John Royce's vice- president. 'If they should determine that there is a discrepancy in your documentation, no matter how small it may be, they can withhold payment for any length of time until that is resolved.'

Many business people in Hong Kong are increasingly worried that the corruption problem will spill into the territory. Since 1989, the Independent Commission Against Corruption has prosecuted and convicted 385 people known or alleged to be involved with China- funded companies in Hong Kong. And reports of graft in Hong Kong rose 42 per cent last year to 3,284.

One serious concern is the arrival of People's Liberation Army soldiers in Hong Kong after 1997. The PLA is widely believed to be involved in smuggling stolen luxury cars from Hong Kong to Guangdong province, and soldiers earn extra income by helping people to cross illegally into Hong Kong.

But of even more concern in the long run is the possibility that expanded economic ties with China will lead to a gradual acceptance of more corruption.

(Photograph omitted)