How China Manipulates Foreign Firms
WHY YOU SHOULD CARE
The Chinese Communist Party is using a little-known mechanism to increasingly get foreign firms to toe the line.
When the NBA bent over backward in October to appease Beijing after a fallout over the Hong Kong protests, the basketball league’s actions drew swift criticism for kowtowing to an authoritarian regime. Daryl Morey, general manager of the Houston Rockets, in a (subsequently deleted) tweet said, “Fight for freedom, stand with Hong Kong.” That led to China suspending preseason NBA broadcasts, withdrawing sponsors from games in the country and severing ties with the Rockets.
Faced with the prospect of a tweet undoing decades of work to foster growth in the NBA’s most important foreign market, the league buckled. But the basketball association’s decision to toe the Chinese Communist Party (CCP) line is far from the exception. Away from the NBA’s public humiliation, China is using a previously little-used mechanism to quietly control relations with foreign brands and businesses operating in China, say experts. And more and more international firms are quietly complying with the demands of the CCP.
That mechanism is a party committee that operates within private and state-owned firms and institutions, whose members are drawn from both the party and the companies in question. Officially, these committees exist to allow businesses to remain better informed of legal and regulatory changes and up to date with the political climate in China. Yet they’re a behind-the-curtains way for the party to increasingly exercise influence over companies operating in the country, say experts.
Firms are paying more attention to not engage in actions considered unacceptable by the party.
Xin Sun, King’s College London
Until 18 months ago these party committees were largely symbolic, but as of the end of last year, 106,000 foreign-owned firms had set up CCP committees, amounting to 70 percent of such companies operating in China, according the country’s Organization Department of the Central Committee. That’s a 125 percent increase from 2011, when the figure was 47,000. Overall, of China’s 2.7 million private firms foreign and domestic, 68 percent have set up a party committee, up 30 percent in the past five years. From Walmart to Walt Disney, multiple American giants have party units in China.
“The CCP has always shown the administrative power to crack down or punish firms who don’t follow party line,” says Xin Sun, lecturer in Chinese and East Asian business at King’s College London. But exercising this power has become increasingly prominent under President Xi Jinping, he says. “And firms are paying more attention to not engage in actions considered unacceptable by the party.”
That’s reflecting in both hidden and public ways. Midway through 2018, Chinese authorities issued warnings to 44 international airlines to alter their websites that listed Taiwan as a separate entity from China. The warning sent other firms scrambling to make sure their websites adhered to the CCP’s wishes. In October 2019, Dior was forced to apologize for showing a map of China that excluded the self-ruled island, which Beijing considers a breakaway Chinese province. In recent months, Versace and Calvin Klein have also issued public apologies for listing Hong Kong as a country rather than a special administrative region of China.
One reason for the readiness of foreign firms to incorporate party committees — which aren’t mandatory — is the government’s changing approach to regulations. Essentially, the government has started enforcing regulations a lot more rigidly than it did earlier, says Philip Beck, chairman of Dubeta Ventures China, a private holding company. “Over the past four or five years, things have gone from very loose and very gray, driven by a hope that self-regulation would prevail to a system of state regulation, some of which is pretty tough,” he says. What makes it particularly difficult for foreign firms is the trend under Xi, says Sun, of “selective enforcement of laws and regulations.”
“Foreign firms are more likely to be picked to make a point when it comes to enforcement,” says Sun, citing legal action against foreign companies for violations commonly practiced across the industry.
The explosion in these party committees has certainly brought business closer to the CCP’s sphere of influence, but looking at this as purely a means of increasing government control would be a mistake, cautions Chris McNally, professor of political economy at Chaminade University. “The party committee is very seldom the overlord,” he says, and the avenues of communication created by the committees favor both the authorities and the firm.
Beck agrees that “party committees are very much a two-way street.” But the idea is for businesses and authorities to work together “to achieve China’s ultimate goal — a return to the Middle Kingdom’s economic heyday.”
There is no doubt that companies, domestic and foreign, will continue to run afoul of China’s political sensitivities. As ties between the party and businesses grow closer in sectors across the world’s second largest economy and the confidence of China’s authorities goes from strength to strength, toeing the CCP line will only become more important for foreign firms. And with the Chinese consumer market vital to global industries — from luxury goods to aviation — stepping out of line can have increasingly severe consequences.
In some instances, those outcomes will be made spectacularly public, as with Morey and the NBA. In most cases, the party committees will make sure you won’t even know about it.