Just a couple of weeks ago I wrote about how China and Germany announced that they would work together on a second high-speed, magnetic-levitation (mag-lev) train line.

Well, don't book your tickets just yet. The sound of Chinese President Hu Jintao's and German Chancellor Angela Merkel's mutual backslapping has scarcely faded from the Great Hall of the People, but the deal already looks like it's coming unstuck, thanks to a peculiarity of making technology investments into China.

First one's free, boys...

The Financial Times broke the news (here via China Daily and AFP) on June 3 that talks between China and Germany over the new line had stalled, apparently because Germany was unwilling to hand valuable, proprietary technology over to the Chinese.

Essentially, China's proposition to the Germans was this: You hand over some of the technology behind your train and we'll hire you to help build the new Shanghai-Hangzhou line. However, the Germans, having already subsidized Shanghai's existing airport mag-lev train as a demonstration, decided the price looked a little steep. So it looks like people traveling from Shanghai to Hangzhou will have to take the regular train or fly for the time being. (The good news being that they can still take the old mag-lev to Pudong if that's where they're flying from.)

This is a fine demonstration of one of the Chinese Government's interesting quirks. They love it when technology companies invest in China. But they love it even more when they do what are called "technology transfers", and giftwrap their know-how for Chinese industry. Think of it as a kind of extra tax for doing business in China. Foreign companies that won't share technology with Chinese counterparts, some of which are potential rivals, risk losing out on deals and opportunities.

An interesting story in today's New York Times highlighted another case. China wants to lower air pollution from coal-burning power plants, and foreign companies make equipment that can help. But the Chinese Government doesn't want to buy the expensive equipment; they want to learn how to make it. Companies like GE have to decide how much information they are willing to share in order to make deals.

This situation touches almost all foreign high-technology businesses that come to China. The pressure to share information and transfer knowledge can be overwhelming, and the penalty for being seen as failing to do so can be a bout of nasty PR. Many foreign companies go to great lengths to demonstrate what they do to help grow Chinese technological know-how. They start labs, hire Chinese researchers and build R&D facilities. This kind of effort is so typical that one long-time foreign journalist in China has coined a term for it: PR&D.

So, you want to come to China and sell high technology?

Let's make a deal!