Guanxi, or the rule of man that overrules the rule of law in China.

The Chinese believe that they are dependent on four social groups: relatives, schoolmates, friends and the indirect relationship from the three.

These human relationships create a network called “guanxi’’. Chinese value human relationship so much because of their belief that the “rule of man’’ is more important than the “rule of law’’, which can be subject to manipulation and interpretation.

When you know someone in 1 of the 3 first social groups of your “target”, it’s easier to get access to him/her and trust is pretty much automatically established.

In China, executives and entrepreneurs work constantly to maintain and expand their networks of guanxi.

Inside this set of connections and relationships exists a series of expectations and a level of trust.

When Chinese managers negotiate a contract, they do not rely on the content of the contract but the context in which it was negotiated.

What is important is the relationship among the individuals, because if a sticky detail comes up, Chinese managers feel that communication and relationships will solve it.

Because legal rules can be overruled by contextual considerations or interpreted in different ways. So the law is not definitive in outlining acceptable standards of behavior, it is rather one of the means of achieving a more humane or civilized society.

Also, there is less concern about meeting contract conditions, since the contract is just viewed as a symbol of the relationship among partners.

But this makes it difficult for an outsider to make business in China. Even lower cost, higher quality, higher profit proposals, from outsiders may not be accepted in China.

It is not unethical favoritism but a working system on which the Chinese society have relied on for centuries.

Wal-Mart learned the importance of building relationships with agencies from the central and local governments but also with the local communities.

Bureaucratic red tape and lengthy delays in approval processes were aggravating its operations in the past.

the company carried favors through actions such as inviting Chinese officials to visit Wal-Mart’s headquarters in the U.S., assisting local charities, and even building a school for a local community.

Bottom line: the reciprocity bias is strong in here!