China’s Grudge Match

by John West, Asian Century Institute

China has been charging international companies for anti-competitive behaviour and bribery, and harassing foreign residents. On a recent visit to Beijing we tried to understand what’s going on.

China has been charging international companies for anti-competitive behavior and bribery, and harassing foreign residents. On a recent visit to Beijing we tried to understand what’s going on.

International business used to be welcomed with open arms in China. Deng Xiaoping’s decision 35 years ago to open China to international trade and investment was critical in launching the country’s rapid development. Western, Japanese and other Asian companies brought technology and global best practices to China. And Chinese companies, workers and the economy benefited handsomely.

This is how China became the world’s biggest exporter. Even today, multinational companies account for one-half of China’s exports. This includes the notorious iPhone, iPad and many other electronic products which are assembled by Foxconn, a Taiwanese company.

These international companies were granted many “incentives” (tax breaks, duty free imports, etc) to establish themselves in China, usually in special economic zones. And many of these companies could not avoid getting entangled in corruption, the very currency of Chinese economy and society. Many foreign companies may charge more for their products in China than back home. But this is usually because China does not have open and competitive markets that would bargain prices down.

In recent times, China has been striking back at the hand that fed it.

A whole string of automobile, technology and pharmaceutical companies have been accused and fined for anti-competitive behavior like price fixing, and corruption. Companies like Microsoft, Qualcomm, Daimler, Chrysler, Volkswagen, Japanese auto-parts makers and Glaxo SmithKline have all been involved in cases.

According to the American Chamber of Commerce in China, 60% of companies feel less welcome in China than before, sharply up from last year’s 41%. Some 61% of European companies that have operated in China for more than a decade said doing business in the country is getting more difficult, according to the European Union Chamber of Commerce in China.

Human Rights Watch, an activist organization, has recently highlighted the common interests of both the business and human rights communities. It has called on American and European business to join forces with the human rights community.

Chinese Prime Minister Li Keqiang denies the claim that foreign firms are being singled out. Li says that 90% of the firms charged under the anti-monopoly law are locals.

There are increasing reports of harassment of foreign residents, especially ethnic Chinese with international passports. According to the US State Department:

“Reports of business disputes involving violence, death threats, hostage-taking, and travel bans involving Americans continue to increase, although American citizens and foreigners in general do not appear to be more likely than Chinese nationals to be subject to this treatment”.

Such equality of treatment is hardly reassuring in a country with rampant human rights’ abuses and lack of rule of law.

We heard many explanations for this new trend, and there is likely to be an element of truth in them all.

Most insist that President Xi Jingping is very serious about his economic reform program. And no-one, including multinationals, can be exempt from reform.

Some add that as he is ferociously attacking domestic corruption, Xi cannot be seen to be giving foreigners a free ride. So multinationals are suffering from collateral damage. Xi believes that the very survival of the Communist Party is at stake, and must do his utmost to shore up public support.

Claims that Xi is attacking foreign companies to provide indirect assistance to local companies, may not hold water. With the economy now slowing down, China needs foreign investment. Indeed, it will still need investment and its accompanying technology transfers for many years to come.

This has also led to a softening in Xi’s attitude to Japan, whose investment in China has weakened substantially over the past year or so. It now seems increasingly likely that on the margins of November’s APEC summit being hosted by China, Xi will accord Japanese Prime Minister Shinzo Abe a long-sought-after meeting.

Geopolitics was also cited as a factor for striking at American companies.

President Xi was incensed when the US accused and named five People’s Liberation Army officers as being guilty of cyber espionage. (Xi is close to the PLA, and needs their support at this crucial time.) Edward Snowden’s revelations of US cyber espionage has greatly damaged any credibility that the US has on this issue.

Xi is also angered by Obama’s pivot to Asia, and his refusal to accept China’s proposal for a new security arrangements, which would see a reduced role for the US (and a bigger role for China) in Asia. Xi believes that the US must make way for China as a rising power.

Many observers, like Sydney University’s Kerry Brown, are quick to point out that China is “neither a missionary culture nor a values superpower“. China has no desire to colonize or invade other countries, and is more concerned with its domestic problems — so the argument goes.

But President Xi is clear about the Western Pacific being a legitimate Chinese sphere of influence. And former Chinese foreign minister Yang Jiechi is famously quoted as saying that “China is a big country and other countries are small countries and that is a fact”. They do not seem to think that sovereign countries should have the right to choose their own allies.

This is clearly motivating China’s assertiveness in the East and South China Sea. China sees the countries of Southeast Asia sees as mere pawns in its “great game“, as it tries to redraw maritime borders by force.

But the affected countries want no truck of Chinese domination, and are cooperating ever more closely with the US. Even Malaysia has reportedly invited the US to fly spy planes out of East Malaysia on the southern rim of the South China Sea. And the venom of disenchanted neighbors can be seen in the death of 18 Chinese nationals in the Philippines so far this year, 14 of those by murder or kidnapping.

Strident nationalism and anti-Japanese sentiment are evident in every conversation in China. The government has done a great job in pumping up the Chinese population, especially through TV shows and movies. Thus, prosecuting big-name Western and Japanese companies panders nicely to popular nationalism.

The long, lingering shadow hanging over everything in China is its desire to recover from the century of humiliation, between the mid 19th century opium wars and the civil war. China wants to be treated with the respect due to a world power and the soon-to-be world’s biggest economy. But as the Economist magazine recently wrote, China “does not know how to achieve or deserve it“. This requires generosity and magnanimous behavior rather than bully tactics.

From a Western perspective, this all seems like “China’s grudge match“, motivated by a chip on the shoulder. But as a leading China-watcher said to me, “the world looks different when seen from Beijing“. We also have to understand that too.