Yin-yang contracts show the power and the limitations of legal norms and corporate reputations

Researching Chinese companies and business executives, I recently came across a term I had never heard before. Yin-yang contracts (阴阳合同) refer to the presence of two parallel agreements a company signs with an individual or a business partner. The yang is the public one, to be submitted to investors, law enforcement agencies, and other scrutiny; the yin is the confidential one that contains the actual terms of operational ties between the two parties. Implicitly, the contents of the two are quite different, allowing the two parties to do one thing in practice while presenting something different.

What is interesting about this phenomenon is that both parties are complicit in flaunting their investor and legal obligations. In past decades, it was quite common for one party to ignore contractual obligations. Stories abounded of workers and suppliers going months and even years without receiving their payments. But yin-yang contracts can formalize these delays by getting the workers and suppliers to agree to late, more modest payments in the yin that is not obvious in the yang. The agreement hidden from the public allows the firms to look generous while staving off unexpected protests that worsen public image.

While it is difficult to say whether some parties are forced to sign onto more disadvantageous yin contracts, the fact that firms now feel the need to sign one instead of simply breaking the terms of the yang contracts shows at least a bit of improvement in corporate governance in China. Firms are now scared enough of legal repercussions or perhaps savage online pillorying by proactive netizens that they take the idea of adhering to contracts more seriously. Even knowing that their yin contracts perhaps have little legal enforcement value, employees are signing onto them anyway as a form of corporate norm.

Still, the fact that there needs to be that obvious discrepancy between yin and yang contracts shows the ideals of the labor market, with certain legal and ethical norms of financial compensation and operational procedures, cannot stand in the reality of the wider Chinese business environment. Excessive competitiveness and high unemployment mean that plenty are willing to sign up for work that violates legal standards. Firms themselves need to signal compliance while eeking out limited profits through whatever unspeakable advantages they can muster.

Sadly, the situation is by no means unique to China or any economic environment facing competitive pressure. Here in Malta, the recent fiasco surrounding the questionable renovation of a town square led many to question whether the same concept of yin-yang contract is alive and well. The ruling Labor Party rushed through the completion of the new Buggiba Square ahead of the national elections on May 30. After the fanfare of Labor politicians inaugurating the project, the public arrived to notice how the finished product differed greatly from the original plan released years ago.

With fewer trees, seating, and no central fountain, the new Square somehow still came out to a final expenditure of more than 10 million euros, despite the original proposal having a budget of less than 2 million euros. Taxpayers are miffed by investigative reports suggesting the presence of what can be called a yin contract against the proposal's yang, with a designer and construction firm linked to Labor bigwigs pocketing abnormally large paychecks for their service by inflating, on paper, the costs of raw materials they had to source.

What was even more frustrating for local residents was how the square, with its much-downgraded finish, could have taken more than two years of construction that completely halted foot and vehicular traffic to the center of the town, hurting businesses and residential access throughout. Visually, most of the time, the construction proceeded at a minimal pace, with few workers on the ground as if only to illustrate the project remains ongoing. Only with the election approaching did the worker count drastically increase, allowing the flurry of last-minute activities to complete the project before May 30.

Many Maltese sigh a dismayed sigh at another one of the fiascos that saw the country grow wealthier at the expense of the relaxed, laidback style of living that traditionally characterized these islands. One day they might just be as cynical as the average Chinese to not fight this reality, but to expect that there is a yin and a yang to every business arrangement. Rather than complaining about how the politicians' friends benefit, perhaps they can even consider signing up to hidden agreements that help them at least get a slice of the pork-barrel spending.