Addressing Rising Business Risk in China

Publication: China Brief Volume: 16 Issue: 8

Police pass out fliers on China's first national security day

As the People’s Republic of China (PRC) celebrated its first-ever National Security Day, anti-foreigner sentiment appears to have been made an official part of the Chinese state’s increased vigilance. A widely circulated cartoon depicted a stereotyped Western man seducing an unwitting Chinese woman into espionage (Weixin, April 17). Meanwhile the National People’s Congress enacted a new law further restricting non-governmental organizations (many of which have foreign funding or employees). This new legislation follows other laws on cyber security and terrorism that offer additional broad powers to the government to oversee and manage foreign companies invested in China (China Brief, January 25; China Brief, December 21, 2015).

Over the last several years, the risks associated with doing business in the PRC have risen due to Chinese suspicion of foreign business people and assets in China and escalating tensions with its major trading partners (China Brief, October 5, 2012). In the meantime, foreign investment appears to be cooling off as the Chinese economy shifts away from double-digit growth, though the PRC remains a compelling foreign business priority. However, stricter regulations and a seemingly desperate anti-espionage campaign may have led to detentions of foreigners, including the recent beating by State Security agents of an American diplomat. A review of how Chinese governments have dealt with foreigners on its soil in the past and a survey of recent developments indicate that a sea-change in how China treats foreigners may be underway.

The Usual Suspects

Western business people must first understand that the friendly and professional English-speaking Chinese who staff their enterprises in the PRC are representative of neither the broader population nor Communist officialdom. Among ordinary people in China, suspicion of foreigners remains strong. In the early 19th Century, foreigners brought unwelcomed and uncontrolled commerce to China, most prominently dangerous drugs, which led to the First Opium War (1839–42). The “Century of Humiliation” (百年国耻, 1842–1949) followed: foreign nations invaded China, established colonies and “spheres of influence,” and sent thousands of Christian missionaries. [1]

In response, Chinese governments have restricted the number of foreigners on Chinese soil and circumscribed their movements. But as the “Century” droned on, China lost control of its sovereignty. The period ended with the Communist victory in 1949 when, as Mao Zedong famously said, China “stood up” against foreigners. The new People’s Republic became a mostly closed nation.

Communist Entrepreneurs Meet Foreign Capitalists

Mao’s death in 1976 and the ascent of Deng Xiaoping led to opening and reform, bringing a new wave of foreigners to see the sights, do business, study, and even spread Christianity in the guise of learning Chinese or teaching English. [2] In 2011, the total number of foreigners living in China passed 650,000 (Figure 1), a historic peak, though growth may finally have begun to slow. A 2016 survey of American businesses indicated that 77 percent feel less welcome in China as immigration restrictions, bilateral tensions, restrictive regulations, intellectual property rights concerns, pollution, and economics combine to discourage investment. At the same time, the upcoming Bilateral Investment Treaty and the expansion of China’s middle class encourage U.S. businesses to stick it out (Confucius Institute Mandarin House, August 27, 2013; Amcham China 2016 Business Climate Survey Report).

China last saw comparable numbers of foreigners and foreign companies during the 1930s. At that time, the central government was not in control of its borders, Japan carried out a series of devastating invasions, and other foreign interference was legion. Historically, large numbers of foreigners in the country are not associated with a strong China. This places extra pressure on the present-day host government to keep them under surveillance. Chinese people tend to more easily grasp these realities than foreigners.

Figure 1, Foreigners and Firms Resident in China [3]

Limited information from multiple sources; blank cells indicate information not available.

Year

Number of Foreigners Resident in China

Number of Firms

Most Prominent

Nationality

Other Prominent Nationalities

1879

3,814

351

British

American, German

1903

20,404

1911

153,522

2,863

1921

240,769

9,511

1928

325,000

6,473

Japanese

Russian, British, American

1936

370,393

Japanese

1950s

12,600

Soviet

1987

52,000

2004

468,200

2010

593,832

144,284

Korean

Japanese, American, Russian

2011

685,775

222,639

Korean

American, Japanese, Russian

2012

633,000

Korean

American, Japanese

While foreign presence in China shot up since the 1990s, the Chinese Communist Party also expanded by almost 3 percent per year, from 64.5 million members in 2000 to 82.6 million in 2011 (CPC.org; Sina.com, June 6, 2012). Many new communists came from the business world under the “Three Represents” program to expand membership beyond workers, peasants and soldiers, a purposeful effort to keep the Party relevant. [4] But there was an unintended consequence: corruption. With more “entrepreneurs” or business people in the Party, much more money to be made, and so many foreign business people in China, a rise in corruption seems, in retrospect, inevitable. This situation—the CCP’s membership bulging with ideologically unreliable new members now under investigation—carries strands of similarity with a previous time: an influx into the CCP of urban intellectuals fleeing from enemy areas to the communist redoubt of Yan’an in the late 1930s. Their entry into Party ranks was followed by movements for “cadre checking” and other, sterner measures, led by the CCP’s Organization Department and its nascent intelligence organ, the Social Affairs Department. [5] Chinese President Xi Jinping’s late father, Xi Zhongxun, supported these efforts, and undoubtedly described them to his son.

Not Your Father’s Anti-Corruption Campaign

Even though Xi Jinping’s close allies seem exempt, today’s anti-corruption campaign and the wide-ranging purges of errant officials are popular in China. In addition to high ranking “tigers” like former Politburo members Zhou Yongkang and Bo Xilai, thousands of “flies”—Chinese officials at the lower levels of the Party, military and government—have been examined and imprisoned. This has changed their behavior in previously unimaginable ways and engendered an abundance of caution. In the military, hard liquor is officially banned at social gatherings in favor of beer. Officials in customer-facing positions interacting with foreigners have been more hesitant than usual to meet or dine. [6] The climate of paranoia is extending to beyond Chinese officialdom. “Foreign hostile forces” are widely cited as being behind numerous ills. [7] Foreign companies such as Astra Zeneca, GM and Microsoft and have either been visited in “dawn raids” or their executives have been detained for questioning, often on suspicion of monopolistic activities (Huffington Post, May 1, 2015; NY Times, August 13, 2014; The Independent, July 22, 2013).

Other groups that had previously been tacitly ignored, such as foreigners in China who worship in unregistered English-language fellowship groups, are now experiencing greater scrutiny. [8] Last April, Xi Jinping told a CCP conference on religion in Beijing to “resolutely guard against overseas infiltration via religious means” (Xinhuanet, April 23). Xi reportedly aims to close all unregistered churches in China by 2017. China is now home to over 80 percent of East Asia’s total Christian population. Within China, the percentage of Christians as a percent of the population rose from 1.2 in 1970 to 8.1 in 2010 (or 106 million worshippers), with projected growth to 10.5 percent by 2020. [9] As an essentially foreign ideology, it is possible that many ordinary Chinese non-believers, and PRC officials, find this growth of Christianity alarming.

Chinese and American Responses

Beyond the measures described above, a series of investigations against senior Ministry of State Security (MSS) officials (Caixin, January 16, 2015) appears to have contributed to an “anti-spy” (反间谍) campaign as the Ministry struggles to justify its existence (China Brief, April 21; Xinhuanet, November 2, 2015; War on the Rocks, July 22, 2015). Signs of the campaign have been evident since 2014, and appear partly focused on foreign business people. Corporate security activities that were previously tolerated, such as routine TSCM work (sweeps for audio and video devices) designed to detect low-tech, competitor-planted devices, now risk detention of the technicians and confiscation of costly equipment. Business people with intelligence and security backgrounds—or those mistaken for the same—have been detained and questioned by the MSS or Chinese Customs. At worst, they are asked to establish cooperative long-term relationships. At best they are required to explain their backgrounds and describe their duties. Residence visas for U.S. business people are now harder to obtain for those without backgrounds in desired technologies, probably also due to counterintelligence concerns. [10]

More ominously, two reliable sources have described the November–December 2015 detention and severe beating of an unidentified U.S. State Department consular officer in Chengdu by the local State Security Bureau. MSS agents also roughed up the Consul General (i.e.: the head of mission) when he visited the Bureau to recover his officer. The State Department Press Office could provide no information but did not deny the story after checking with the regional bureau. [12] While ordinary foreign visitors and journalists are sometimes treated badly by security forces, this incident would be highly unusual and indicates that the gloves may be coming off on the Chinese side.

In the U.S., a spike in announcements and leaks of spy cases, as well as the Federal Bureau of Investigation’s economic espionage awareness program, show that Americans are ratcheting up their efforts to stymie Chinese espionage in general, and illegal technology acquisition efforts in particular (USNI, April 13; Department of Justice, March 30 and April 14; FBI.gov, July 23, 2015).

Take Steps to Mitigate Risk

It is important to reject the widely held idea that taking normal security precautions in China will “offend the Chinese” or somehow be a breach of trust. In reality, standard security programs have been encouraged by Public Security Bureaus for years. If handled properly by well-trained security professionals and explained by your communications team, standard programs will reassure your Chinese employees that the company is not an easy target for technology theft and ordinary crime (contact the author for details). In addition, for U.S. companies, do not reject the possibility of advocacy by the American Chamber of Commerce (Amcham) in China, the U.S. China Business Council, or U.S. Commerce Department’s diplomats in embassies and consulates. The track records of all three are good in helping U.S. companies achieve acceptable conditions.

Conclusion

The environment in China for foreign companies is now more sensitive than in recent memory. Added to historical irritants are developments that have generated more than the usual official suspicion of foreigners, possibly more surveillance and other scrutiny, and a harder line as an apparent tit-for-tat struggle grinds on between China and at least the U.S., if not other trading partners like Japan, Taiwan and Australia. The risks should not be ignored, and cannot be mitigated by relying on “connections” when so many bigger forces are at work. In the threat-risk calculations widely used in the security industry, risk is controllable but not “threat”—in this case the behavior of state actors who are beyond the control of business (Pinkerton, 2014).

Matt Brazil is a Nonresident Fellow with the Jamestown Foundation. He spent two years in Korea with U.S. Army Intelligence, completed a tour as a military assignee at the NSA, and lived in China for eight years, first as a US Foreign Commercial Service officer and later as a corporate security manager. In 2012 he completed a doctoral dissertation at the University of Sydney on the early history of Chinese communist intelligence systems. His work in the U.S. Government and as a corporate investigator focused on aspects of the PRC’s high technology markets, and the nature of China’s changing society.

Notes

1. Martin Stuart-Fox, A Short History of China and Southeast Asia: Tribute, Trade and Influence (Sydney: Allen and Unwin, 2003), pp. 109–117; For a controversial explanation of the “Century” see Peter Hayes Gries, China’s New Nationalism: Pride, Politics and Diplomacy (Berkeley: University of California Press, 2004), pp. 47–52.

2. Author’s numerous interviews with American Christian missionaries in various Chinese cities, 1996-2010.

3. Sources: Xinhuanet, 2014 and 2013; Shanghai Daily; correspondence and interviews in Beijing and Liaoning with U.S. Embassy and Chinese officials; Ministry of Public Security, Entry and Exit Administration; Nathan Pelcovits, Old China Hands and the Foreign Office, New York: King’s Crown Press, 1948; Kenneth W. Lieberthal, Joyce Kallgren, Roderick MacFarquhar, Frederick Wakeman, eds., Perspectives on Modern China, Four Anniversaries, Armonk: East Gate Books, 1991; Albert Feuerwerker, “The Foreign Presence in China” in John K. Fairbank, ed., The Cambridge History of China, Vol. 12, Republican China 1912-1949, Part I, Cambridge: Cambridge University Press, 1983; Pingwen Kuo, Julia Johnson, China Yesterday and To-Day, New York, H.H. Wilson, 1928.

4. David M. Lampton, Ruling China, from Deng Xiaoping to Jiang Zemin (Berkeley: University of California Press, 2014), p. 67.

5. While the “Salvation” campaign of 1943 is now viewed as excessive, the longer “Rectification” (1942–44) is seen as having healthy results. Luo Yanming, “Chen Yun, Kang Sheng, and the Yan’an Cadre Examination” [陈云,康盛与延安干部审查], in Dangshi Bolan [An Exposition of Party History], no. 8, 2010. Chen Yun, “Strengthen Secret Party Organizations in the Main Rear Area and in Enemy Occupied Areas ” [巩固 党 在大后方及党战区的秘密组织], in Works of Chen Yun, 1926–1949, [陈云文献, 1926–1949] (Beijing: Renmin Chubanshe, 1984), pp. 203–204.

6. A web search on “foreign hostile forces” (境外敌对势力), yields over 23,000 results

7. Author’s interviews, January–April 2016.

8. Author’s interviews, 2008-15. Search of “Christian fellowship” and any major Chinese city name for a sampling. See also sites promoting missionary work in the PRC, such as www.gospelinchina.com and http://www.projectchina.org/.

9. Center for the Study of Global Christianity, “Christianity in a Global Context” (Gordon-Conwell Theological Seminary, 2013), p. 36. The VOA article above carries a lower figure: 82 million.

10. Author’s interviews, 2014–16.

11. Author’s interviews, 2016; correspondence with State Department Press Office, April 28–29.