The evidence is mounting that Xi Jinping, China’s president, is ever tightening the communist party’s control of all aspects of society in China. In addition to internet censorship, rewriting school textbooks, and imposing ideological crackdowns on arts, music, and entertainment, the communist party now wants to control all aspects of business including those companies that are foreign owned. Does this seem like an ideal environment for foreign entrepreneurs to open and operate a business?
Bringing Control Apparatuses to Businesses: A major effort is underway to have managements of private firms rewrite their company charters to include a significant role for the ruling communist party. The trend is for party committee members to be consulted beforehand on major decisions. For private firms, the party members seek to be merged with the management in the same manner that takes place in State Owned Enterprises (SOES) and also the military. A major effort is made to ensure that only individuals trusted by the communist party will ever have a part in decision making at highest levels in private businesses as they do in the SOES. Further, the party usually seeks out to have guidance authority over all personnel decisions, placing Human Resources under tight party control.
Control over Appointments, Promotions, and Significant Personnel Moves: Control over appointments, promotions, even hirings provides the party committees a major aspect of control in any business. In one industrial area up to twenty-five percent of all CEOs of private firms were communist party chiefs. The goal, whether declared or not, is to create a “modern enterprise system with Chinese characteristics,” or giving an essential role in running private companies to party members. The higher up the position is in terms of authority and responsibility, the more involvement the party seeks to achieve. In the case of joint ventures between foreign firms and the SOES, the rewritten company charters provide for the company’s party secretary to also be named the Chairman of the Board of the joint venture. The European Union Chamber of Commerce in 2017 pointed out to Chinese leaders in Beijing that this extensive party involvement could have “serious consequences for the independent decision-making ability” of these joint venture enterprises. But in regular practice, insiders say that there is no alternative.
Communist Party Movements Are Often Subtle: When it comes to business activities within a foreign owned business, it is often difficult to pinpoint the actions that the communist party committee takes. They work in subtle shapes and forms, and usually behind the scenes. Officials always deny any meddling in any foreign businesses by communist party members, but party regulations require that in any workplace, if three or more employees are communist party members, they must form a party branch. With seven or more employees, one of them must be appointed as a party secretary.
Growth in Exit Ban Laws: China has a total of fifteen exit ban laws. Their usage has multiplied by as much as eight times since 2018. The laws themselves are often vague in content and can lend legality in China to detentions of foreigners that would be considered unlawful in most other places in the world. For example, if business negotiations were to go unfavorably for a Western entrepreneur, he/she might be prevented from leaving China until agreement on the terms of the deal is reached—even if the terms are unacceptable to the Western entrepreneur. The Chinese government denies that any harassment of foreigners in the form of blocking their entry or exit exists. And it appears that the exit ban laws are aimed at intimidating foreign nationals of Chinese descent who have left the country, often with a personal fortune, to pursue happiness elsewhere. But the threat of it happening to any foreign businessman should tend to restrain the growth of foreign enterprises in China and the entry of foreign capital.
Broadening Counterespionage Laws: On July 1, 2023, China updated its counterespionage law that broadens the definition of spying, and bans the transfer of any data deemed by the government to pertain to national security. The U.S. Department of Commerce issued a warning to the investment community that the updated law has greatly broadened the number and types of documentation that could be linked to national security. Even data that would be considered proprietary to the company’s owners or management in most other countries could fit under the broadened definition of the law, giving the state an opportunity to threaten foreign entrepreneurs in an increasing number of ways.
Enforcement Can Carry Over Into Another Country’s Jurisdiction: Enforcement of China’s restrictive policies does not always end at China’s borders. In April, 2023, two people were arrested for operating an illegal Chinese police station in New York City. This is believed to be a part of a global network to monitor the activities of individuals of Chinese descent and suppress dissidents no matter where they live. North American and European nationals of Chinese descent are particularly vulnerable, as China does not recognize dual citizenship and believes that all Chinese born in China “owe a debt of cultural obligation to China” as per David Lampton of the John Hopkins School of Advanced International Studies.
Conclusions: It all adds up to a more hostile business environment for outsiders trying to do business in China. The paradox is that the Chinese central government wants to see more foreign investment coming to China. Even with all the subtleties, the word gets around in foreign investing circles that it can be difficult if not impossible for a foreign businessman to effectively run a company in China.
Sources: The Economist, Firm Control, July 8th, 2023.
nbcnews.com, China’s Use of Exit Bans Leaves Americans At Risk of Being Arbitrarily Detained, By Alexander Smith, and Henry Austin, July 27, 2023.
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