Chinese Paranoia

Command and control: China’s Communist Party extends reach into foreign companies
By Simon Denyer

Chinese dictator attends the 19th National Congress of the Communist Party of China at the Great Hall of the People in Beijing in October. Xi’s vision of complete control over Chinese life is intruding into the boardrooms of foreign companies.

BEIJING  — American and European companies involved in joint ventures with state-owned Chinese firms have been asked in recent months to give internal Communist Party cells an explicit role in decision-making, executives and business groups say.
It is, they say, a worrying demand that threatens to put politics before profits, and the interests of the party above all other considerations. 

It suggests that foreign companies are no longer exempt from Xi Jinping’s overarching vision of complete control.
“The creeping intrusion by the party apparatus into the boardrooms of foreign-invested enterprises has not yet manifested itself on a large scale, but things are certainly going down that path,” said James Zimmerman, a managing partner of the law firm Sheppard, Mullin, Richter and Hampton and former chairman of the American Chamber of Commerce in China, who is instructing clients to “push back.”
The party’s demand would give its cells a formal role in approving management decisions, such as investment plans or personnel changes. 

And that is ringing alarm bells.
At the same time, a campaign to reinforce China’s draconian censorship of the Internet is beginning to affect foreign companies.
The twin efforts to keep tabs on foreign companies are an expression of the Communist Party’s constant paranoia about internal stability. 

But they also represent a shift in the balance of power here, as China feels itself to be stronger economically and Western businesses more dispensable.
Not every company is affected by the changes. 

Larger enterprises have dedicated lines and special technology ensuring unfettered Internet access. But the smaller ones do not have that latitude.
By the same token, wholly owned foreign ventures have not faced the same pressure from internal party cells, while even companies involved in joint ventures are pushing back against the new demands.
But everyone is aware which way the wind is blowing.
For decades, China was something of an El Dorado for foreign companies, its low wages luring manufacturers and its vast consumer market and rapidly expanding middle class presenting an unrivaled opportunity for growth — even if it was always a challenging place to operate. 

These days, the mood has perceptibly changed: China is no longer so keen to put out the welcome mat, and foreign companies are increasingly prone to complain of unfair treatment.
Even after the wholesale transformation of the Chinese economy, the Communist Party has remained ever present in business. 

Executives of state-owned firms are party members, while under Chinese law, any organization that has three or more party members has to provide the “necessary conditions” for cadres to establish a party cell.
In practice, that rule has not, up to now, been intrusive.
Party members might use company premises to meet, but they would tend to do so after office hours and might help organize social events for employees. 

Executives described relations as friendly and cooperative, with the cells acting at times as if they were adjuncts to existing human resources departments.
In the past year, that has begun to change. 

Party members are expected to spend more time studying Xi Jinping Thought, the president’s political theory, in office hours or in time-consuming off-site retreats. 

Although a formal role for party cells in management decisions is not required under Chinese law, business executives are worried about a trend toward growing party interference.
“The long-term negative cost, in my view, is the inefficiencies and wastefulness that are likely to result from political influence that has no other purpose than to drive the political machine,” Zimmerman said.
The European Chamber of Commerce in China said in a statement that introducing an “additional layer of governance” would have serious consequences for the independent decision-making ability of joint-venture companies and deter investment from the continent.
China’s investment law stipulates that foreign companies must enter into joint ventures in many sectors of the economy. 

Already, many companies are being used simply to mine their intellectual property, before they are one day pushed aside by their erstwhile partners.
For now, minority joint ventures are feeling the most heat from party cells, but even 50-50 joint ventures have reported a growing assertiveness, executives and business groups say.
“That’s the danger European investors see, a kind of salami-slicing tactics, that starts with the minority joint ventures, then heads for the 50-50 joint ventures, and eventually heading for the 100 percent foreign-owned companies,” said Joerg Wuttke, former president of the European Chamber of Commerce.
“We really want people here to understand: We don’t object to party activities or people, but we do want them to stay away from operational questions,” Wuttke said.
The controls on the Internet could follow a similar salami-slicing tactic, whereby controls are extended across smaller companies first.
China has embarked on a major crackdown on VPNs, or virtual private networks, technology that is widely used to jump over the country’s Great Firewall to gain access to banned websites such as Google, Facebook, Twitter and many foreign news sites.
Although large companies use dedicated lines and technology known as MultiProtocol Label Switching, which allows them to bypass the firewall and encrypt messages, that’s often too expensive for small and medium-size enterprises that rely on commercial VPN and encryption software.
Some companies have had ports closed down until they register with local telecommunications operators and report who is accessing the Internet and why.
To regain full access to the Internet, one American company was asked to sign a “solemn commitment” — that it would obey the Chinese Communist Party’s “seven bottom lines,” do nothing to undermine the socialist system, public order or social morality, and wouldn’t use the Internet to violate the interests of the state.

Chinese dictator shown on a screen in front of logos of China’s leading Internet companies, Tencent, Baidu and Alibaba Group, during the fourth World Internet Conference in Wuzhen, China, in December. 
The agreement, made in Shanghai last November, is typical of the hoops some foreign companies are having to jump through to maintain access to the Web, and to continue doing business in a country where politics is back on top of the agenda.
That has led many American companies to take a “much more cautious approach” to regulating who within their organization uses VPN software, said Jake Parker, vice president of China operations at the U.S.-China Business Council in Beijing.
A mergers and acquisitions team might, for example, be cleared to access websites such as Reuters and the Financial Times to make better business decisions, but other staffers would be more restricted, Parker said.
“That’s because there is an emerging consensus among our legal counsels that using VPNs for noncommercial functions could be construed as potentially violating China’s rules and regulations,” he said. 

“There is a ‘more safe than sorry’ approach.”
Parker said not everyone was taking this approach, but there has been a shift in that direction, with “10, 15 or 20” companies saying they had adopted similar procedures.
An ongoing clampdown on VPN use by private individuals could also have a negative effect on recruitment, executives say: Parents will be reluctant to relocate to China if their children can’t access their preferred social media sites, many of which are banned here.
A more fundamental anxiety is that the Communist Party will ultimately demand to see everything that flows in and out of the country over the Internet, under China’s new Cybersecurity Law, which went into effect in June.
“How safe will intellectual property and trade secrets be? Will servers have to be stored here? Will companies have to hand over encryption codes to Chinese authorities?” asked a ­Beijing-based diplomat, who spoke on the condition of anonymity to discuss sensitive matters.
“Could perhaps entire industry sectors become off limits for foreigners for security reasons? It’s not clear whether Chinese authorities are aware of possible collateral damage to businesses.”
To an extent, Beijing does not care as much about foreign firms as it used to, with a definite hubris setting in after the Western financial crisis, experts say.
“Foreign companies used to be seen as special here, as friends of China,” said James McGregor, a China-based author and businessman. 

“But that kind of flipped during the Western financial crisis.”
Attitudes changed, he said. 

China began to believe its system of state-directed capitalism was superior to the West’s, and that foreign companies are simply “here to serve us.”
One consequence: As President Trump starts to take retaliatory action against China over its trade and business practices, Beijing is putting off some of its most valuable lobbying partners.
“In the past, foreign business has been an important ally for China, but the country now appears to be alienating it at a time when it most needs friends abroad,” said Wuttke, the former president of the European Chamber of Commerce.

Sina Delenda Est

China Hasn't Won the Pacific
By Hal Brands

Is China destined to dominate the Asia-Pacific? 

Among U.S. allies and partners in the region, there seems to be a growing doubt that America can win the ongoing competition for influence with China, and that they must begin preparing for a regional order headed by Beijing. 

The challenge for America, then, is to ensure that this feeling of strategic fatalism doesn’t become a self-fulfilling prophecy.
It is an undeniable fact that China has been making a concerted and accelerating push for regional supremacy in recent years -- and that the U.S. has struggled to respond effectively. 

The military balance of power has shifted considerably over the past two decades, as Beijing has undertaken a military buildup of historic proportions and America’s efforts to counter it were undercut first by a lengthy military involvement in the Middle East and then by budgetary austerity and defense cuts.
As a RAND Corporation study published in 2015 warned, the regional balance is reaching a series of "tipping points" at which the U.S. might find it increasingly difficult to defend allies and partners such as Taiwan from determined Chinese intervention at an acceptable price.
China has also been expanding its regional influence through incremental steps that have cumulatively had a major effect: coercing its neighbors in the East China Sea and South China Sea, building and militarizing artificial islands in contravention of international law, seeking to separate the U.S. from its allies through a mixture of coercion and economic inducement, and so forth. 

Such salami-slicing tactics are inherently difficult to counter, because they shift the status quo without escalating matters to a level that might set off a U.S. military response. 

During the Barack Obama presidency, U.S. officials were often stymied by this predicament, warning against Chinese expansionism but struggling to identify measures that might thwart or even significantly penalize that expansionism absent a full-on military showdown.
The result of all this has been a dramatic shift in perceptions of power and momentum in the region, raising the question of whether the U.S. can meet the Chinese challenge. 

While much of this concern is still being expressed privately, behind closed doors in the capitals of America’s allies, it is also seeping, gradually but unmistakably, into public debates.
Case in point is a recent essay by Hugh White, a former Australian defense official who turned heads in 2013 by arguing that America should “share power” with China as part of a new great-power concert in the Asia-Pacific. 

White has now re-entered the fray with a widely read essay arguing that it may be too late for even that type of compromise arrangement given China’s ongoing ascent.
China is determined to push the U.S. out of the region, White argues, and it is making great progress. 

Unless Washington is willing to fight a potentially catastrophic military conflict to thwart Beijing’s momentum, the long-term outcome of the competition is a foregone conclusion. 

The U.S. will slowly but surely be edged out of its role as arbiter of the balance of power. 

China will increasingly set the rules of the road across the Asia-Pacific. 

The task for U.S. allies is thus to begin adapting to a post-American regional order, one in which Washington can no longer protect its friends or otherwise play a decisive strategic role.
White’s essay is dangerous reading. 

It offers perhaps the most bracing demonstration yet of just how adversely the climate in the Asia-Pacific has shifted over the past several years, and how badly regional perceptions of U.S. leadership have eroded. 

China is no longer the threat of tomorrow: It is reshaping the regional order today, at the expense of the U.S. and its closest allies. 

And while most policymakers and elites in Australia and other allied countries are not ready to concede the outcome of that competition, their faith in Washington is increasingly being tested.
In Australia, for instance, White is hardly alone in publicly questioning his nation’s continuing reliance on the U.S. 

Former Prime Minister Paul Keating has voiced similar ideas. 

And in the Philippines, President Rodrigo Duterte has ostentatiously repositioned his country between Beijing and Washington on the thesis -- exaggerated, no doubt, but nonetheless telling -- that “America has lost” its strategic duel with China.
It would be foolish, then, for U.S. policymakers to simply dismiss the concerns that are emanating from Australia and other Asia-Pacific countries. 

But it would also be dangerous for U.S. and allied leaders to accept the thesis that China is destined to dominate the region and simply give up on countering Beijing’s ambitions.
China appears imposing today, but it is hardly 10 feet tall. 

As I discuss in my new book, “American Grand Strategy in the Age of Trump,” Beijing is still no match for the U.S. in aggregate national power: Its military budget is still less than half that of the Pentagon’s, and its per capita gross domestic product remains roughly a quarter of America’s, even as its overall GDP approaches parity.
Moreover, China is certain to encounter serious economic and political difficulties in the coming years because of the rapidly approaching limits of its existing growth model and the inherent instability of authoritarian rule. 

It is a fantasy to believe, as U.S. observers sometimes have, that China will collapse or democratize before it is able to make a serious bid for geopolitical supremacy in the Asia-Pacific. 

But it is hardly preordained that China will be able to maintain, over a period of decades, the impressive trajectory needed to decisively overtake America as the region’s leading power.
In fact, the U.S. and its allies can make it enormously difficult for China to accomplish that objective. 

For example, the same maritime geography that complicates U.S. efforts to project power into the areas along China’s coastline makes it hard for China to project power outward, toward its neighbors and beyond. 

The island chain running from Japan to the Ryukyus to Taiwan and the Philippines constitutes a series of natural barriers to Chinese expansion into the Pacific.
As Michael Beckley of Harvard’s Belfer Center has recently written, it should therefore be possible for U.S. allies and partners such as Japan and Taiwan to blunt Chinese expansionism by acquiring the same anti-access/area denial capabilities (anti-ship missiles and mines, for instance) that Beijing has deployed to good effect.
There is also much more the U.S. and its partners can do to impose greater costs on China’s destabilizing behavior, such as slapping sanctions on Chinese companies involved in activities like illegal land reclamation, helping friendly countries fortify their own holdings in the South China and East China Seas, and responding to Chinese advances by deploying additional U.S. military assets to the region.
These measures carry increased costs and risks in their own right, of course, and they offer no guarantee of success in what seems certain to be a decades-long geopolitical struggle with China. 

But the U.S. and its allies can still hold their own in that contest, so long as they don’t succumb to a misplaced fatalism. 

The only sure way to lose in the Asia-Pacific is to give up the game.