Last week the Financial Times published an account of the That's Magazines saga. The piece quotes both That's founder Mark Kitto and a named official from the Chinese company that now controls the magazines. If you subscribe to the FT's website, you can find it here. If you don't subscribe, it is reproduced, a la Xinhua below.

UPDATE: China Herald has posted an email interview with Kathleen Lau, who was a co-founder of That's magazines together with Kitto but sold her share to Kitto in 2001.

Lau started to write a column for That's Shanghai after Kitto was kicked out. She has a slightly different story to tell. The interview is here.

Fingers caught in the presses
By Richard McGregor
Published: May 3 2005 17:31

In July 2002, Mark Kitto found himself at the offices of China Intercontinenntal Press, a Beijing-based publisher. The British entrepreneur was there to meet Yuan Baan, a man whose connections offered him the chance to pull his business out of a dangerous legal limbo.

After establishing his first listings magazine in the southern Chinese city of Guangzhou in 1997, Mr Kitto had managed to turn himself into a mini magazine mogul.

In four years he built up a stable of four English-language magazines in three cities. By 2004 the business had a turnover of almost $4m and more than 100 staff.

But before he could think of further growth, he had one problem - he had to make his business comply with Chinese media laws.

"The way I had always done things in China was to act first and then sort things out later," he says. "In general, it worked out."

With Mr Yuan, however, things did not work out. After a cautious courtship and then a fateful falling-out, the 38-year-old lost his magazines and felt so targeted by officialdom that he returned to Britain.

Mr Kitto's story is a cautionary tale about the risks for foreign entrepreneurs - especially those without the backing of large companies - who invest in Chinese media, a sector over which the government maintains tight control.

Foreigners can distribute and sell advertising for magazines in China but cannot be responsible for content. The government reinforces this rule by requiring all publications to have numbered permits, which are issued by the General Administration of Press and Publications, under the State Council, China's cabinet.

The government's permit system, however, lags far behind the market. Since the late 1990s, foreign-language listings magazines have been set up to cater for growing expatriate communities, most without official approval.

Mr Kitto's magazines, such as That's Shanghai, developed cachet with locals as well as attracting advertising from the booming property and restaurant industries.

But publishing the magazines was only one part of Mr Kitto's job. Much of his time was spent on politics - that is, trying to secure partnerships with the all important holders of publishing numbers that would keep his magazines open.

The most difficult market was Shanghai, which operates tough media controls. Yet it was also the most profitable because of the city's wealth and international population. In one raid, local officials confiscated the magazine' computers. In another, they sat down at the magazine's offices, put their feet up on the desks and demanded that they be brought buckets of Kentucky Fried Chicken for lunch.

From June 1999, That's Shanghai survived by using a licence number from the Yangzhou government in return for running a page each month about the attractions of the nearby city. Mr Kitto kept control of the business by entering into an "exclusive consultancy arrangement" with Yangzhou, as well as with an advertising agency that was owned by the magazine's Chinese financial controller.

"I had deliberately kept the thing floating out there so that when a structure came along, I could put everything in," he says. "I relied on trust."

His approach was not as foolhardy as it sounds for a start-up in China. Even large companies have taken risks by investing ahead of compliance with the letter of the law. But sooner or later, especially as he expanded into Beijing, Mr Kitto knew he needed a legitimate local publishing partner. Mr Yuan seemed just the man.

Mr Yuan was part of China Intercontinental Press, a publisher with close ties to the State Council Information Office and with a brief to promote China to foreigners.

The two started co-operating in July 2002, with Mr Yuan's CIP initially providing the magazine company with publishing numbers normally reserved for books. It was not until early last year, when the two started to negotiate a joint venture, that problems surfaced. Mr Kitto remembers being put firmly in his place from their first encounter. "The first thing to know," he recalls being told by Mr Yuan, "is that this is not going to be a negotiation of equals."

That much became clear when Mr Yuan showed Mr Kitto the list of city magazines in Guangzhou, Shanghai and Beijing, and their publishing numbers. CIP had added a new magazine that it had decided to publish itself, called That's China. The new title began selling advertising space cheaply, eating into the revenues from the other titles.

Worried about losing his magazines, Mr Kitto began talking confidentially to Tom group, a listed Hong Kong company that was keen to push into the mainland media market.

When CIP found out, it summoned Mr Kitto to Beijing for a meeting. Having arrived at Shanghai airport for an early morning flight, however, a sixth sense told him to return to the office.

He arrived there to find his managers and staff assembled with Mr Yuan. Under pressure to keep their jobs, most had switched sides.

Mr Yuan is unabashed about what happened, saying the magazines had been illegal until CIP had taken over as the publisher in 2002. "During our cooperation, Mark has never been our legitimate partner. He hasn't signed any files so far and it is deceptive of him to claim to be the boss," Mr Yuan says.

Yet Mr Kitto had not finished. He had started a travel magazine, Voyage, in cooperation with a publishing house in Guangxi province. He also still owned the trademark to the listings magazines. But he had underestimated Mr Yuan, who had kept in reserve an unpublished copy of a 2003 review by Mr Kitto of a book on Xinjiang, a touchy topic in China because of the region's separatist movement.

Mindful of the sensitivity, Mr Kitto had submitted a copy of the review in advance to CIP and had not been surprised when it was not published.

In April this year, however, his partners in Voyage had rung up "in hysterics", saying they had been asked by the authorities in Beijing to explain why they were working with a supporter of "Muslim separatists".

Mr Yuan admits that when he was asked by the Guangxi group about Mr Kitto's past record he told them about the Xinjiang review. "This is quite natural. Mark is a foreigner and doesn't have a wide scope of knowledge. He should first comply with Chinese law," says Mr Yuan.

Mr Yuan also wants ownership of the trademarks, saying it was "illegal" for Mr Kitto to buy them from a local magazine in 2002, three months after CIP had started to help as a publisher.

Now left contemplating his future in England, Mr Kitto intends to fight to keep the trademarks, or force CIP to pay him for their use. But victory is not assured, especially now that his name has been tarred politically.

As Mr Kitto remembers Mr Yuan saying to him when they were still on friendly terms and talking about a structure for the magazines: "Mark, if I say it is illegal, it is illegal."

THE RISKS OF VENTURING TO FIND A WAY THROUGH THE RULES

Even though the legal environment in which business operates has developed substantially in the past decade in China, most investors remain at the mercy of the bureaucracy, rather than any body of settled law.

Sometimes this can benefit investors. Officials with the administrative discretion to decide what is legal or not, free of scrutiny by an independent arbitrator in the form of the courts, can stretch the rules to make sure projects get off the ground.

But in areas that are considered strategic by the government, such as the media, officials can keep projects off-limits to foreign investors. China has kept the media sector strictly controlled, giving only limited access to powerful global companies such as News International and Viacom, despite many trips to Beijing over the past decade by top executives lobbying for the market to be opened.

At most risk are investors who succeed in circumventing the regulations, but whose businesses are never officially sanctioned at the top levels of government.

Occasionally, such companies are tolerated, especially if the government is interested in experimenting with opening up a particular sector to competition. But if the political winds change, as they did with Mark Kitto, then a foreign company risks losing its investment altogether.