Constant dollars

The fading allure of doing business in China


IIT’S NOTHING again for foreign companies to suffer the upheavals of the Chinese Communist Party. From revolutionary times, Chairman Mao’s victorious troops did not directly confiscate foreign assets as their Bolshevik predecessors did in Russia. Instead, they exhausted them with higher taxes and fines so large that companies ended up giving up their assets for nothing. In a memorable case unearthed by Aron Shai, an Israeli scholar, a British industrialist in 1954 said he handed everything over to the Communists, from “large blocks of godowns (warehouses) to pencils and paper”. And yet, he complained, Comrade Ho, his counterpart, continued to haggle “like a pre-liberation shopkeeper.”

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Although multinationals have flocked to China since, government bickering continued, encompassing everything from technology transfer to free corporate investment. There have been big improvements, but the teasing is a constant reminder, as one American puts it, that companies shouldn’t get “too big for their pants.” Western companies operate in China with tolerance, and the country may one day seek to replace them.

As a result, some may have felt a sense of Schadenfreude that Chinese, not Western, companies have been the main victims of President Xi Jinping’s recent efforts to socially design a new type of economy. In the past week alone, the government has taken steps to lower barriers between tech giants Alibaba and Tencent, and, according to the Financial Time, ordered the dismantling of Alipay, a financial super-app owned by Alibaba’s sister company, Ant. Some even go so far as to make flattering comparisons between Mr. Xi’s efforts to emasculate China’s tech “oligarchs” and how US and European governments are preying on Western tech giants.

The heaviness, however, cools to an unusual degree. The whim too. Kenneth Jarrett, a seasoned China observer in Shanghai for the Albright Stonebridge Group, a consultancy firm, says the question on everyone’s lips is “who could be next? The crackdown comes against a backdrop of growing tensions between China and the West that leave multinationals stuck in a sort of semi-legal vacuum. For many, China’s appeal remains irresistible. But the perils overtake the promise.

Besides banks and asset managers, some of whose investments in China have been hit hard in recent months, several types of multinational companies are at risk. One group includes those who make most of their money in China, from pimping to a golden elite who flaunt their purses and sports cars at $ 3,000. Another includes companies that irritate their customers for what can be interpreted as Western arrogance; Tesla, the electric car maker, is one example. A third category includes European and American manufacturers of advanced manufacturing equipment and medical devices that China believes must produce itself.

As usual, the threats come in the form of political announcements that seem deceptively bland. One, “common prosperity,” is a catch-all phrase ranging from reducing social inequalities to more pampering workers and clients to nanny overworked youth. Its most obvious impact is on Chinese tech, tutoring and gaming companies, which have lost hundreds of billions of dollars in market value as a result of government crackdown. Yet multinationals have also been caught in the fallout. In a few days in August, the valuation of European luxury brands, such as Kering, supplier of Gucci handbags, and LVMH, a seller of trinkets and bubbles, fell $ 75 billion after investors finally took Xi’s common prosperity agenda seriously.

Xi does not intend to force Chinese consumers to return to Mao’s costumes. But its war on flamboyance, especially among the wealthy who can spend at least $ 100,000 each a year on foreign brands, threatens the most lucrative part of the market. It also puts luxury brands at risk that charge Chinese consumers more than in their outlets, for example, in Milan. Flavio Cereda of Jefferies, an investment bank, expects the government to continue supporting a growing middle-class luxury market, as ambitious purchases reflect economic success. If China spoils the experience, the shock could be huge. Its consumers account for 45% of global luxury spending, he says. “No China, no party.”

“Dual circulation” is another buzzword with disturbing connotations. It is an attempt to promote self-sufficiency in natural resources and technology, in part in response to fears that a reliance on Western suppliers will make China vulnerable to geopolitical and trade pressures. But it also poses a threat to Western multinationals in China by reducing technology imports and creating a “buy Chinese” mentality. Friedolin Track BDI, a German industry federation, notes that state-owned enterprises in China have reportedly received procurement guidelines that require domestic supply of devices such as X-Beam machines and radar equipment.

Between a block and a hard place

Everything becomes a catch-22. On the one hand, America, Europe and their allies are in a geopolitical conflict with China, which they blame for human rights abuses in places like Xinjiang, home of the oppressed Uyghur minority. The West wants to restrict the technologies that its companies sell to China and the materials, like cotton, that they buy there. On the other hand, China is asserting its right to retaliate against companies it claims are engaging in geopolitics.

Jörg Wuttke, President of the EU The China Chamber of Commerce says the size of the Chinese market is worth it. “The biggest risk is not being in China,” he insists. Still, anyone with a long-term perspective might see Mr. Xi’s undisputed personal authority, his gamble on reshaping the Chinese economy, and the grim geopolitical backdrop as more than enough reasons to consider an exit. It may never happen to that. But as in the post-revolutionary era, sometimes one warning shot too many is enough to convince even the most daring industrialist to throw in the towel. â– 

This article appeared in the Business section of the print edition under the headline “Who Will Be Next?”


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