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PurposeRecognizing the significant impact of guanxi (the Chinese network of reciprocal business relations) and its influence on everyday dealings in China is important for Western firms. Researchers argue that social capital has limits and is not a commodity that has a place in China aspiring to be a global business hub. Accordingly, the purpose of this paper is to deal with the question of whether guanxi still matters in the Chinese business arena, and if so, to what extent.Design/methodology/approachTo illustrate the evolutional direction of the Chinese institutional system, the authors compare it to a similar system that went through the evolutionary cycle from a social to a rational institutional base of exchange and discuss what one can learn from the institutional evolution process of the global diamond industry and its implications for the current evolution of Chinese institutions. The authors compare two similar cultures/religions, Judaism and Confucianism.FindingsThis study found parallels between the evolution of the Israeli diamond industry, dominated by Orthodox Jews, from a social exchange mechanism to a transactional mechanism and the present ongoing rationalization of the Chinese economy, dominated by the Confucianism culture from a social to a transactional business mechanism.Originality/valueDespite the vast efforts of researchers in the area of guanxi, there is very little published knowledge about its limitations and its usefulness in today's changing business environment. This paper contributes to the existing literature on the future aspects of guanxi from a unique perspective – the evolution of the Israeli diamond industry.

The article reports on a study to examine the application of guanxi attributes and the pathways linking them to success and performance in the context of business-to-business relationships in the Chinese diamond industry. We draw on and adapt the Ganqing, Renqing and Xinren (GRX) scale to reveal a paradox in terms of how business is conventionally conducted. This is interesting because in Western markets that are typically governed by arms-length transactions the diamond industry is somewhat unique, as it is built on very close socially driven relationships. The paradox also occurs in the Chinese context, as the opposite is prevalent i.e., in a nation that often relies on social guanxi ties to drive business, the diamond industry is heavily characterized by a somewhat antagonistic arms-length approach. The study pieces together and tests a concept drawing on a sample of 212 diamond merchant traders operating in China. We discover that interpersonal trust (Xinren) has a positive influence on both emotional attachment (Ganqing) and obligational favor (Renqing), but has a direct negative influence on Performance (the paradox). Ganqing serves to positively influence Performance and Renqing leads to greater Satisfaction-which in turn has a positive bearing on Performance. Several implications are extracted from the study that provide useful insights into the ways that guanxi is perhaps becoming more or less prevalent in China.