Foreign Businesses in China: Out on a Limb?

Even when Chinese relations with major trading partners are stable, arbitrary actions by the host government against foreign businesses in China have not been uncommon. At present, China’s relations with Japan, the United States and several other nations seem on an uncertain trajectory—a state of affairs well described elsewhere (Beijing Morning Post, September 21; “Diaoyu-Senkaku Crisis Tests Resilience of Beijing’s Japan Diplomacy,” China Brief, September 7; Global Times, April 21). Yet foreign businesses in China now have the highest exposure ever if measured in numbers of people, companies and assets there. That can mean unacceptable, even if temporary, risk when tensions rise. Standard problems like sudden public anger or employee militancy, unexplained shipment delays and host government demands on local Chinese employees for confidential information can become more acute. In previous crisis periods like 1989 and 1999, drastic actions have been taken, or allowed, by Beijing, including the following: seizure of assets, detention of employees and attacks on facilities.

Historical forces provide at least a partial explanation for the high risk of doing business in China and how it has sometimes reached unacceptable levels. Understanding these forces helps identify measures needed to mitigate risk, which are described in the conclusion.

Highest Tide, Greatest Exposure: More Foreigners, Companies, and Investment than Ever

During traditional times, popular and elite thought placed China at the center of the world with all other states subordinate [1]. In between then and now came the so-called “Century of Humiliation” (bainian guochi, 1842–1949) when foreign nations invaded the country, took territorial concessions, and usurped China’s sovereign powers. Today, all Chinese students from primary school to university learn about this time. The most chaotic and violent period of that century was arguably 1911–45, when foreign influence rose to an unprecedented level.

In the thirty years before the Communist victory in 1949, foreign political models were tried and retried; unequal treaties from the last dynasty remained in force; and from 1931 to 1945 the Japanese invasion dominated the nation’s affairs, marked by indelible war crimes that loom large in the collective memory.

If the three decades before the founding of the People’s Republic of China were the worst of times, some might argue the thirty-odd years after Mao Zedong’s death in 1976 became the best of times, even though the level of foreign people, companies, and direct investment in China again reached a historic crescendo (World Economics [Beijing], January 2004; U.S.-China Business Council, “Foreign Direct Investment Inflows 2001–2011,” 2012).  However, it cannot be an original observation that the last time such foreign influence was present, chaos and revolution reigned. Perhaps it is not coincidental that arrests for “endangering state security” have risen to historically high levels—985 arrests on these charges in 2010—reflecting concerns about several problems including increased espionage (“Beijing’s ‘Wei-Wen’ Imperative Steals the Thunder at NPC,” China Brief, March 10, 2011; Duihuanews.org, March 2011; The Telegraph [UK], March 29, 2010).

A China That Can Say No

The Cold War ending in 1989 had linked U.S. and Chinese interests with an importance and urgency that has not been replicated in the subsequent post-Berlin Wall, post-Tiananmen Massacre era. Before and after 1989 there were many agreements, protocols, and MOUs between the U.S. and China on specialized issues such as scientific cooperation, health, maritime affairs, education and so forth.  Since 1989, persistent Cold War-type disputes, however, have harried bilateral relations.  The two nations have not come close to a treaty or agreement comparable to the 1989 Malta Summit that ended the U.S.-USSR Cold War or establishing a clear set of rules for handling inevitable crises [2].

U.S.-China bilateral agreements on technical issues partly reflected a mutual desire to separately develop commercial relations. Then paramount leader Deng Xiaoping worked with a consensus, begun in fits and starts after the U.S.-China rapprochement in 1972, to maintain stable relations with the United States and promote security and modernization [3]. Deng’s widely cited quote at the time, “hide one’s capacity and bide one’s time” (taoguang yanghui), partly symbolized his successful efforts to maintain this policy in spite of continuing U.S.-China bilateral tensions (Xinhua, August 9, 2004; South China Morning Post, June 30, 1990).  Jiang Zemin stayed the course after Deng gradually withdrew from the scene and passed away in 1997, and commercial relations with other countries, especially Japan, also blossomed.

Resentment of Japan, however, had never really abated. It also was growing against the United States among left wing intellectuals and, more importantly, the wider population. One symbol of distrust was the 1996 book China Can Say No. It spawned a sequel and imitators that remain popular, depicting the United States as a self-interested hegemon trying to stop China from further development. They were partly an argument against lying low and biding time, partly one asserting that U.S. human rights policy was a façade to pursue selfish interests. They also evinced a paranoid streak that continues to this today in some Chinese circles (“Fear and Loathing in Beijing? Chinese Suspicions of U.S. Intentions,” China Brief, September 30, 2011).

Just as important, these criticisms implied the CCP was too soft on Washington, a popular idea linked to many recent public protests which were nationalist and pro-authoritarian—in distinct contrast to the anti-authoritarian demonstrations of the 1980s that led up to the Tiananmen Massacre. For separate reasons linked to issues from World War Two, protests against Japan also have arisen regularly, resulting in attacks against Japanese interests.

Perhaps with this popular dissatisfaction in mind, Beijing appears determined to crack down against offending countries like Japan, Vietnam, the Philippines and the United States. Among other developments is the diplomatic push to establish a “new type” of U.S.-China relationship requiring compromise only from one side. In July, two senior Chinese diplomats wrote “China has never done anything to undermine the U.S. core interests and major concerns…yet what the United States has done in matters concerning China’s core and important interests and major concerns is unsatisfactory." Apparently referring to the rest of the field, they added “There have been some problems recently in China’s neighborhood. China is not the maker of these problems, and still less the perpetrator of the harm. Rather, it is a victim on which harm has been imposed” (“China’s Search for a ‘New Type of Great Power Relationship’,” China Brief, September 7).

Popular pressure on the Chinese political leadership not to give in to foreign powers comes at a time when the United States, Japan and the European Union appear economically weakened and China also is under economic stress. The outlook for anti-foreign sentiments in China is not eased by the possible weakness of the CCP’s political leadership, while the political strength of the most anti-U.S. elements of the leadership elite, its “control cartel”—the military, the security services as well as the CCP Organization and Propaganda departments—is arguably as high as at any time since 1949 (“A Chinese Assessment of China’s External Security Environment,” China Brief, March 25, 2011; The Diplomat, March 3, 2011) [4].

A serious conflict with an important trading partner could lead to severe trouble for a business with high exposure in China that suddenly finds its nationality identified as China’s adversary du jour. Such a situation could find China’s opponent asking for U.S. political or military support, and retaliation against foreign businesses in China could follow.

How Foreign Businesses in China Might Be Affected

Even in stable periods Chinese workers can suddenly act in a militant fashion against foreign managers in isolated situations [5]. In periods of extreme tension, action by workers and other Chinese against foreigners can become widespread. The host government has seized assets, opened fire on diplomatic housing and allowed assaults against diplomatic posts and residences.

The last three periods of extreme tension with the highest danger for foreigners in China came during the following:

1.  the violent phase of the Cultural Revolution (1966-1968);
2. in the weeks after the Beijing Tiananmen Massacre of June 1989;
3. the week after the U.S. bombing of the Chinese embassy Belgrade on May 8, 1999.

During these times, the host government either unleashed masses of citizenry with license to attack targeted foreign nationals and institutional symbols (1966-68; 1999), or used the forces at their command (1966-68; 1989) to pursue punitive measures against chosen foreign nationalities, their organizations and/or Chinese affiliated with them. Foreign companies, often driven by the demands of the moment including upcoming quarterly results and their effect on stock prices, tend to handle such issues ad hoc. This may lead to a similar approach when they are faced with real emergencies. With today’s higher exposure and greater potential for instability, it is a good time to consider more systematic approaches to managing risk.

More Far-Sighted Risk Mitigation

In most politically unstable countries, foreign firms do not hesitate to carry out their duty to protect employees and assets by instituting thorough evacuation plans, providing frank security briefings to employees, assigning armed guards where necessary in accordance with host country laws and so on. Public relations, brand image and perceived host country sensibilities, however, work to discourage the same steps in China. This is partly due to the lucrative and unstable nature of China and its market as well as the controls the host government has over large scale economic activity. Moreover, foreign business executives sometimes express the wish to “avoid offending the Chinese” as if the egos on the Chinese side were fragile beyond understanding.

An approach modeled on standard management expectations for industrial security should be seriously considered. None of the measures listed below are meant to stand alone as solutions. They are intended for development into a security program tailored for business operations in a lucrative market with an unstable polity and high theft risk against intellectual property (IP):

• Regularly remind foreign employees and dependents that Chinese law requires them to carry passports at all times. Ensure backup copies are available and that all foreigners carry material in Chinese stating their specific affiliation with the company, such as the employee’s business card;
• Reach an agreement with the local public security bureau and their superiors in the municipal party committee that they will provide immediate notification if an employee is detained;
• Initiate a sustained effort to keep foreigners aware of China’s ever changing internal travel restrictions. Ensure the travel department has a robust process to avoid violating them and to locate travelers in emergencies;
• Initiate a security briefing program at a minimum for foreign employees and family members of an agreed age that frankly discusses the problems such as IP risk, the dangers of an aggravated crowd, how to deal with police and so on;
• Contrary to widespread belief, thorough background investigations on local Chinese employees are possible, and may include ordinary criminal conviction inquiries and verification of previous employment. Pursue these to satisfy the same management expectations within local law as done in any other country;
• Conduct a serious practical review of evacuation plans in China and consider engaging providers who can supply chartered evacuation aircraft and experienced planning;
• Decide what to do about critical IP assets in China, including how to dispose of them and of export-controlled equipment there if a situation threatens their loss;
• Purchase enough high-capacity document shredders so that all sensitive waste is easily destroyed by individuals without the risky practice of collecting them intact and in bulk. Never send confidential material to an outside contractor for destruction—a surprisingly common practice;
• Consider expanding the company’s technical surveillance countermeasures (TSCM) program to China—it can and has been done, and does not need to be kept secret from the host government;
• Consider ways, within the restrictions of U.S. or other relevant home country laws, to cultivate appropriate relationships with contacts amongst the more powerful sectors of the party and government, the “control cartel.” 

Many in the business world believe that “China is different” and that an antidote to uncertainty is guanxi (connections) at high levels in the relevant industrial ministry and the local CCP Committee.  If the political situation between China and one’s home country sours, however, major decisions regarding foreign interests are more likely to be taken by one or more organs of the “control cartel.”  Local CCP contacts will be given the job of managing foreign companies and their personnel and will be less inclined than in stable times to make their case to higher levels.

Adding to the confusion, analysts strongly disagree on China’s future. Some predicting its coming collapse; others asserting that the Chinese century has arrived.  Many key issues, however, remain unclear: party-military relations, how well the economy will weather the worldwide financial downturn, loyalty of the country’s peripheral regions to Beijing, stability of the countryside, even the long term viability of unchallenged CCP rule. A more convincing argument says that China is unlikely to become a “waxing hegemon or failed state” as long as the current system prevails (“China’s Shades of Grey,” China Brief, September 7). Businesspeople with interests in China should consider the implications of putting their people and assets through continued cycles of uncertainty without significant risk mitigation.

Businesspeople should not accept dated notions that “China is different” or that personal relationships and loyalty are more important than common sense. These ideas are less relevant as China becomes more integrated in the world economy, yet less politically stable.  Business in China is still business, and the China is still a nation-state with rational interests, opaque though its politics may be.

Notes:

1. John K. Fairbank, “Introduction: The Old Order” in Denis Twitchett and John K. Fairbank, eds., The Cambridge History of China Vol. 10: Late Ch’ing 1800–1911, Cambridge: Cambridge University Press, 1978, pp. 29–31.
2. U.S. Department of State, “Treaties in Force: A List of Treaties and Other International Agreements of the United States in Force on January 01, 2011,” pp. 52-55; and Peter Hough, Understanding Global Security, pp. 40–41.
3. Feng Jianzhi, Jin Chongji (eds.), Mao Zedong zhuan [Biography of Mao Zedong, 1949-1976], Beijing: Zhongyang wenxian chubanshe, 2003, pp. 1668–1669; Frederick Teiwes and Warren Sun, The End of the Maoist Era, Armonk: M.E. Sharpe, 2007, pp. 126–128.
4. Susan Shirk, China, Fragile Superpower, Oxford University Press, 2007, pp. 83–84; Alice Miller, “Splits in the Politburo Leadership?” China Leadership Monitor, No. 34, Winter 2011; David Shambaugh, “Coping with a Conflicted China,” Washington Quarterly, Vol. 34, No. 1, Winter 2011.
5. For example, during a 2004 strike at an U.S. company’s factory in north China, workers unexpectedly imprisoned U.S. managers on the premises for a day and a night, according to this author’s interviews in 2005. Similar incidents also occurred at other U.S. businesses in 2010 and 2011, according to other interviews conducted in China.