China’s Grudge Match Against Multinationals: Biting the Hand That Fed It

China has been making the news with charges of anti-competitive behavior and bribery leveled against large multinational companies operating there.

That is quite a sea of change. International businesses 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.

All went according to plan: Western, Japanese and other Asian companies brought technology and global best practices to China. 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 iconic iPhone, iPad and many other electronic products which are often assembled by Foxconn, a Taiwanese company.

These international companies were granted many “incentives” (such as tax breaks and duty free imports) to establish themselves in China, usually in special economic zones.

As local custom would have it, many of these companies could not avoid getting entangled in corruption. It is, after all, the lubricant of the Chinese economy and society.

Many foreign companies are also in a position where they may charge more for their products in China than back home. By and large, this is due to the fact that China does not have open and competitive markets where prices could be bargained down.

China has been striking back at the hand that fed it

A whole string of automobile, technology and pharmaceutical companies has been accused and fined for anti-competitive behavior like price fixing and corruption. Companies like Microsoft, Qualcomm, Daimler, Chrysler, Volkswagen, and GlaxoSmithKline 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%. In a rare case of transatlantic harmony, 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.

China’s 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 local.

There are increasing reports of harassment of foreign residents, especially ethnic Chinese with international passports. According to the U.S. 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 abusive treatment is hardly reassuring in a country with rampant human rights’ abuses and lack of rule of law.

When I explored all of these issues on a recent trip to Beijing, I heard many explanations for this new trend, and there is likely to be an element of truth in them all.

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

An important dimension is this: As Xi is ferociously attacking domestic corruption, he 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 that he 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. If anything, 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 need 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, which is hosted by China, Xi will accord Japan’s Prime Minister Shinzo Abe a long-sought-after meeting.

Geopolitics was also cited as a factor for striking at American companies. Xi is angered by Obama’s continued effort to undertake a pivot to Asia and the United States’ refusal to accept China’s proposal for new security arrangements, which would see a reduced role for the United States and a bigger role for China in Asia. Xi believes that the United States must make way for China as a rising power.

What’s Chinese for chutzpah?

President Xi is clear about the Western Pacific being a legitimate sphere of Chinese influence. And former Chinese foreign minister Yang Jiechi is famously quoted as saying, “China is a big country and other countries are small countries and that is a fact.”

Based on that “might makes right” viewpoint, sovereign countries evidently should not have the right to choose their own allies. China sees the countries of Southeast Asia as mere pawns in its “great game,” as it tries to redraw maritime borders by force – mainly by relying on a stunningly brazen concept called the “nine-dashes line.”

But the affected countries want no Chinese domination and are cooperating ever more closely with the U.S. government. Even Malaysia has reportedly invited the United States to fly spy planes out of East Malaysia on the southern rim of the South China Sea.

The venom of disenchanted neighbors also 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.

China’s lingering past

The long, lingering shadow hanging over everything in China is its desire to recover from the century of humiliation that occurred 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. Those are completely legitimate aspirations. However, realizing this vision, given China’s innate strength and size advantages requires generosity and magnanimous behavior rather than bully tactics.

In conclusion, from a Western perspective one may be tempted to see what’s going on in China these days as “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.