China with its population of more than 1,3 bln people is the biggest and one of the most attractive markets in the world. Interpersonal relations are one of the driving forces of Chinese society. During the last couple of decades, they also became an integral part of Chinese business environment. They tied millions of Chinese firms in social and business networks and turned to be the key determining factor of company’s behavior in business. The aim of the paper is to examine the nature of guanxi and their role in business life of modern China. The paper reveals the notion, key elements and sources of guanxi. It identifies major benefits and drawbacks of the use of guanxi for different economic actors in their business activities. The paper also provides several illustrative cases of Western MNCs operating on Chinese market which faced the phenomenon and had to react. Institutional theory is chosen as a general theoretical framework for the research. It is also supplemented by network theory which allows proper positioning of research subject. The research is fully qualitative in its nature and combines methods of historical anthropology as well as common qualitative methods of management research, such as case study. The paper makes both theoretical and practical contribution. Theoretically, it contributes to strategic management and international business literature on emerging markets providing better understanding of the phenomenon of guanxi, and, practically, it casts a light upon the specificities of Chinese business environment which could be valuable for companies targeting Chinese market.