Hunting Season for Multinationals in China?

There is a widespread perception among the foreign business community in China that there has been a concerted crackdown on multinational companies since China’s new government took power in March. There have been many headline-grabbing cases in which multi-national corporations (MNCs) faced legal or regulatory problems in China over the previous months, and the sense of uncertainty among the foreign business community is palpable. To view this trend as a crackdown on multinationals alone, however, misses the broader context in which these cases have taken place: the government of Xi Jinping and Li Keqiang is the most activist that China has seen in decades. The intense policy activity it has generated over the past few months is upsetting the status quo for interest groups—both foreign and domestic—in a broad range of areas.

There is no question that multinationals from a wide range of sectors have found themselves under deeper regulatory scrutiny, subject to government investigations or the threat of such action. One major group of investigations links to charges of corruption, the most high-profile of which is the investigation into the British pharmaceutical giant, GlaxoSmithKline (GSK) for allegations of “serious economic crimes” including bribery and corruption (Xinhua, July 11); this was followed by a series of follow-up investigations into other leading pharmaceutical companies (People’s Daily Online, July 24).

Price-fixing and unfair competition have also been strong focusses of a dramatically ramped up effort at enforcing China’s anti-monopoly law (AML). Indeed, this summer has seen the National Development and Reform Commission (NDRC) launch investigations into eight dairy companies (including Abbott Laboratories, Mead Johnson Nutrition and Danone) for price-fixing in infant formula (Xinhua, July 31), following cases earlier in the year where six South Korean and Taiwanese LCD-makers (including Samsung and LG) were fined for price­-fixing (Xinhua, January 4). The State Administration for Industry and Commerce (SAIC) also launched a high-profile investigation into the Swedish food packaging giant Tetra Pak for “abusing” its dominant market role (Xinhua, July 5). Rumors continued throughout the summer about which sector and foreign companies regulators would target next; Xinhua, reported on July 28, for example, that foreign luxury car companies would be next (Xinhua, July 28). China’s state-run media has also jumped on the bandwagon the previous months, launching its own investigations into foreign companies’ pricing practices, most recently in the case of CCTV’s October investigation into Starbucks’s prices in China (CCTV, October 20). 

Foreign recycling companies have also found themselves targeted in a joint campaign by China Customs and the Ministry of Environmental Protection to limit the importation of “Western trash” (yang laji), raw materials exported for recycling in China, under the government’s “Operation Green Fence” (lv li xing dong) initiative. The initiative was launched in February and received increasingly prominent coverage in the national and local media over the summer  (Xinhua, May 24). Foreign IT giants such as Cisco have also come under increased scrutiny in the wake of Edward Snowden’s revelations about US espionage practices; indeed, the China Economic Weekly described eight leading IT companies as “eight guardian warriors” whose influence over the Chinese economy should be curbed as a matter of urgency (China Economic Weekly, June 24).

Is this part of a concerted attack on foreign capital in China? Probably not. For a start, numerous Chinese companies have also been investigated. In terms of price-fixing, several large Chinese firms—such as Kweichow Moutai, Wuliangye, and Biostime—have been targeted, even if the ability of anti-monopoly regulators to go after large central state-owned enterprises is far more open to question. Far more dramatic, however, is the wide-ranging corruption investigation into state-owned oil giant CNPC. Rumors are rife in Beijing about the next anti-corruption targets in China’s state-owned sector.

Secondly, most of these cases link to broader themes being pursued by the Xi-Li government which are not specifically aimed at foreign companies. The GSK investigation links clearly with the government’s broad anti-corruption campaign, the early stage of which focused on domestic political players, but—as noted above—has recently widened to include both foreign and domestic companies. Similarly, China’s recent spate of anti-trust enforcement cases is part of a broader effort to boost the profile and impact of the country’s five-year-old anti-monopoly law. Many of the measures are also populist enforcement efforts aimed at demonstrating the government’s responsiveness to consumer concerns such as medical corruption, the high prices of food and beverage products, and concerns over environmental protection. Indeed, government officials and the Chinese state media have repeatedly emphasized that industries where public complains are most vocal have been put to the front of the list for investigations (Global Times, October 20). Indeed, in the words of Xu Kunlin of the NDRC’s Anti-Monopoly Bureau, “in a situation where we’re short of staff, industries where public complaints are deepest and which are easiest to process will be prioritized” (TenCent Finance, August 22).

All of this should be seen in the broader context of new Party and government leadership which is keen to establish its authority and legitimacy in the eyes of the Chinese public. As the new administration has sought to demonstrate action in all of these areas, foreign companies have been caught up in the cross-fire. In general, they have had a worse time of things than their Chinese counterparts because they are less politically connected than many Chinese companies, especially state-owned enterprises (SOEs), and are therefore more vulnerable. Many Chinese companies also enjoy legal protections that multinationals don’t enjoy: Article 7 of the anti-monopoly law, for example, explicitly protects the “lawful business operations” of SOEs in strategic sectors. Indeed, noting the upsurge in AML enforcement over the summer, the economically liberal Caijing magazine commented that “for the law to be credible, it must be equal. Thus, the regulator must confront the biggest monopolists in the country—state-owned enterprises” (Caijing, August 28).

Some analysts believe that recent corruption investigations in China’s state-owned sector may indeed be a precursor to the new leadership pursuing broader reforms of the state-owned sector at the Third Plenum from 9 to 12 November. In fact, is possible to argue that much of what has been involved in the recent flurry of government activity is actually necessary preparation for any comprehensive effort at economic liberalization. Anti-corruption measures are certainly important to the smooth functioning of a market economy. In fact, the People’s Daily has presented anti-corruption measures in this very light, commenting that investigations into “commercial bribery by multinationals is of deep importance to safeguarding the order of the market economy” (People’s Daily, July 17).

Similarly, a functioning anti-monopoly law, together with experienced enforcement agencies is vital to ensuring meaningful market competition. Demonstrating that the AML can be wielded against foreign companies is also a means of reassuring domestic actors that the liberalization of new sectors of the economy won’t necessarily result in foreign domination. China’s official media has also gone to great lengths to emphasize this point. Xinhua, for example, stated that, “in parallel with the pricing regulatory measures, China is continuing efforts to further open up to foreign business… all in all, the changes in the Chinese market are in the interests of foreign companies” (Xinhua, August 22).

The new regime has certainly been big on the rhetoric of economic reform and liberalization. Xi Jinping began his administration with a visit to Shenzhen, evoking the symbolism of Deng Xiaoping’s “Southern Tour,” which re-launched economic reforms in the early 1990s. Both Xi and Li have made bold and direct public statements about the importance of continued reform and their first major policy initiative—the Shanghai Free Trade Zone—was clearly designed to replicate the Special Economic Zones which galvanized economic reforms in the 1980s. The Zone also introduces a “negative list” approach to foreign investment, brining China into line with international standards, setting a precedent for the use of a negative list across China for future Bilateral Investment Treaty negotiations with the United States, and perhaps even acting as a testing ground for China’s eventual involvement in the Trans-Pacific Partnership, the Obama administration’s flagship “next generation trade agreement” (Caixin, October 21). All of these signals, in theory, are good news for multinational corporations’ businesses in China.

There are increasing doubts, however, about what this reformist rhetoric will mean for foreign companies in practice. Indeed, despite the hype surrounding the launch of the Shanghai Free Trade Zone, most analysts—foreign and domestic—have been disappointed by its substance. Caixin magazine, for example, noted to the fact that the Zone’s negative list “hardly reflects any improvement on existing foreign investment restrictions” (Caixin, October 18). Many have also been dismayed by the political and ideological priorities of the Xi-Li administration so far, including a description of “Western forces hostile to China” in the now notorious Document No. 9, circulated within the Communist Party. These doubts are compounded by the already jaded attitudes of much of China’s foreign business community which has grown increasingly frustrated with the gap between the reformist promises of individuals such as Wen Jiabao over the last decade and what it sees as flagrantly discriminatory policies against MNCs in China.

The new administration’s willingness and ability to deliver on substantive economic reform will become clearer after the upcoming Third Plenum, but whatever the new government’s commitment to and ability to implement economic reform, there is no doubt that the working style of China’s new government is fundamentally different to that of the Hu-Wen administration. This in itself helps to explain the number of foreign companies that have found themselves in trouble over the past months. The level of policy activity—from anti-corruption to anti-trust—in the first months of the government easily makes the Xi-Li administration the most activist government China has seen in decades. Government officials themselves have noted a significant change in governing style between the two administrations, noting the rapid pace of decision-making under the new government. As one official noted, “this government makes decisions really quickly. Problems that previously waited a decade have been solved overnight.” Foreign companies are being caught in the tailwinds of this activist government, but so too are many domestic institutions and interest groups.

The fact that the past months have not seen a crackdown on foreign capital per se, however, will act as a source of little comfort for foreign companies doing business in China who continue to face huge uncertainty about the business environment.

More importantly, even if the new government can deliver on a program of economic reform, this new era of reform and opening will take place in a profoundly different context for foreign corporations in China than previous reform efforts. China’s reforms in the 1990s were aimed to a large extent at attracting foreign investment and technology from a position of relative weakness. China today is different. It is the second largest economy in the world and is seen as a second home market for many of the world’s largest corporations; at a time of economic stagnation in the West, most Western companies need China more than it needs them.

As a result, the balance of power between the Chinese state and multinational corporations has shifted dramatically and irreversibly. The government is in a stronger bargaining position with foreign companies than ever before and it is not afraid to use this position to its advantage. In emphasizing the permanence of this changed environment, Xinhua commented that “facing a diligent watchdog and a better-regulated market here, foreign firms now need to do some homework and adapt to the new environment (Xinhua, August 22).