Report — From the November 2015 issue

The New China Syndrome

American business meets its new master

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This may seem an odd moment to sound the alarm about China. In the past few months, we have seen the near collapse of the country’s stock market, the devaluation of its currency, and the sputtering of its mighty industrial sector. But long term, the picture has hardly changed. China will soon pass the United States to become the world’s largest economy; by some measures, it has done so already. Wages and consumption remain strong, the service and online-retail sectors are hot, and vast portions of the population have yet to buy their first car or iPhone. All of which is to say that China, however challenged, remains as attractive a market as ever for many corporations.

This also means that basic patterns of behavior are unlikely to change anytime soon, and many of China’s recent actions are disturbing in the extreme. Consider its growing bellicosity in Asia. Over the past couple of years, Beijing has unilaterally declared an “air-defense identification zone” over most of the East China Sea, parked a drilling rig off Vietnam, encouraged fleets of fishing boats to anchor around islets long claimed by Japan, and built entirely new islands on reefs claimed by the Philippines. The expansionist itch has been so reckless, so assertive, that Japan’s prime minister recently compared China to Germany circa 1914.

What we have largely missed, though, is the emergence of a similar bellicosity within China, directed not at other nations but at foreign corporations operating inside its borders. When American corporations succeed in China, the result is not a mutual sense of comfort and familiarity, such as Toyota now enjoys in the United States. Instead we see a tightening of control, and increasing efforts to bend these powerful commercial institutions to the will of the men who run the Chinese state.

Rio Tinto, the world’s number-two supplier of iron, was among the first targets of this approach. In 2010, global prices for metals were spiking, and China’s state-owned steel mills pressed the corporation for a discount rate on iron ore. Rio Tinto refused — and meanwhile began selling ore to a few privately owned mills in the country. In response, Beijing simply charged four executives in the company’s Shanghai office, including an Australian citizen, with capital crimes. The tactic seems to have worked. While the four sat petrified in a Shanghai courthouse that March, Rio Tinto CEO Tom Albanese was in Beijing to, as one journalist put it, pay “homage to China’s leaders.” A couple of weeks later, a deal was struck on the pricing of iron ore.

Another early target was Walmart. In October 2011, authorities in Chongqing charged the corporation, which at that time controlled some 10 percent of China’s hypermarket sales, with mislabeling pork products. Let’s recall that Walmart was (and is) the world’s largest company in terms of revenue. This didn’t discourage the Chinese from jailing two of Walmart’s employees, putting seven more under house arrest, and closing all of its outlets in Chongqing for two weeks.

Illustrations by John Ritter

Illustrations by John Ritter

What made the intervention especially telling was where it took place, and when. Chongqing is one of four cities in China directly controlled by the central government, which means the decision to target the U.S. company likely carried the imprimatur of the Politburo. The action also coincided with the publication of a long article in The Atlantic that purported to show how Walmart was cleaning up China’s food supply chain by fighting “pollution, adulterated foods, [and] corruption.” how walmart conquered china, read the headline on the magazine’s cover. In one stroke, Chinese officials made clear exactly whose practices needed cleaning up, and who had conquered whom.

Some observers believe that Chinese authorities target foreign corporations merely for mercenary ends. Their goal, this thinking holds, is to grab patents for Chinese companies, or to shake a little cash into national or personal coffers. These quiet aggressions often do result in measurable commercial advances. Beijing held up Glencore’s takeover of Xstrata, an Anglo-Swiss mining operation, until executives agreed to transfer control of a lucrative Peruvian copper mine to a Chinese company. A lawsuit against InterDigital, which manages a vast portfolio of wireless patents, led that corporation to grant special treatment to Chinese enterprises. Litigation against the chipmaker Qualcomm had a similar effect, and in that instance Beijing tacked on a $975 million fine.

But the Chinese increasingly appear to aim at more direct forms of control over foreign companies. In China, there is no independent judiciary, no rule of law, no real property rights, and certainly no corporate “free speech” rights. Hence one way for Chinese functionaries to control a foreign enterprise is simply to habituate its executives to the lash of arbitrary power masquerading as law.

Just about any law can serve the purpose. Last year, Beijing used anticorruption statutes to fine the pharmaceutical company GlaxoSmithKline nearly $500 million. The year before, the tool of choice was a new antimonopoly law, which Beijing wielded during a sort of mass shaming of foreign executives. Functionaries from the National Development and Reform Commission reportedly summoned in-house lawyers from some thirty companies, including GE, IBM, Intel, Microsoft, Siemens, and Samsung. Once everyone was in the room, officials announced that half the companies present were already under investigation for monopoly crimes — but didn’t say which. According to the Reuters journalist who broke the story, the officials instructed the managers to write down public “self-criticisms,” a Maoist practice designed to coerce individuals into confessing wrongdoing in advance of any trial. A Chinese regulator made the consequences clear: if any company resisted, he might double or triple its fine.

This predilection for mass shaming is not confined to the boardroom. In recent years, China’s state-run television station, CCTV, has produced what is known as the 315 Gala — an annual “consumer-rights program” in which the hosts finger foreign companies for their bad behavior. Hewlett-Packard, Starbucks, and McDonald’s have all taken turns in the dock. In 2013, one of the main targets was Apple. At first, the world’s most valuable corporation refused to flinch. But after the People’s Daily and other state-owned media orchestrated another frenzy of criticism, Apple CEO Tim Cook delivered a formal apology to Chinese consumers, promising them a “profound reflection” on the company’s repair and warranty policies.

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