CHINA BUSINESS – MANAGING THE TRANSITION: FOREIGN BUSINESS IN THE NEW CHINA

Between the founding of the People’s Republic of China in 1949 and the re-opening of the Chinese market in 1979, China was an inward and isolated country; from 1979 to 2009, it became a destination for foreign direct investment and the world’s factory for consumables. The question is: how China will continue to evolve in the next 30 years?

With China’s 19th Party Congress in the fall of 2017, it is becoming increasingly difficult to apprehend the impact of a changing geopolitical landscape on MNCs. Is China on a different course of economic expansion in an era of more modest GDP growth? And how will it affect foreign enterprises in a market undergoing a shift from manufacturing to domestic consumption?

By Kenny Lau


With the upcoming US elections in November and China’s 19th Party Congress slated to take place in the fall of 2017, it is becoming increasingly difficult to apprehend the impact of a changing geopolitical landscape on foreign businesses with vast commercial interest in the markets of China. That’s because the current state of Chinese affairs is relatively opaque and unpredictable today, Christopher Johnson, Freeman Chair in China Studies at CSIS and a former China analyst for the US government, said in a keynote address at AmCham’s China Conference.

“In past administrations, [including those of] Jiang Zemin and Hu Jintao, it did not require a lot of insight – and certainly not classified intelligence – to have some sense of what was going on inside the system, and things seemed to be pretty predictable on certain trajectory,” he notes. “Under President Xi Jinping, this has become much more difficult. The number of people who actually know what’s going on is very small, and sometimes they don’t even know what is going on.”

On the global stage

The recent G20 Summit held in Hangzhou, China was an opportunity for China to present President Xi’s credentials as an emerging global leader, and not much in the way of real substance, Johnson points out. “That is very much the message meant to be conveyed in the G20, and that is exactly how they wanted it. But [there are] a few areas where I think at least the potential for some progress was made.”

“The general agreement among the G20 participants to forge a comprehensive and integrated narrative for strong, sustainable, balanced and inclusive growth is clearly a sign that major world leaders understand the challenges in the global economy,” he says. “There is a sense of willingness to work cooperatively and in an integrated fashion to try to smooth out the difficulties that we are seeing in the global economy.”

The issue of the global financial architecture, however, remains a problem, especially after a year of market turbulence in China where volatility was most apparent in the summer of 2015 and again in the beginning of 2016, Johnson says. “China did a very effective job in making sure that those discussions did not focus solely on China and that China was not to be blamed for a lot of these key structural problems in the global economy.”

“While China did not succeed with their ultimate goal of keeping out all mention of the issue of overcapacity [in the global supply chain], it did manage to have language that basically blamed a significant portion of it on weak global demand, rather than China as the purveyor of all of these overcapacity,” he adds.

One of the key takeaways of the G20 meeting is the notion of guiding principles for global investment policy-making, Johnson highlights. “It does seem that we have an effort by the G20 now to create some rules for inbound investment and trying to create a level playing field among various players.” But it is a challenging environment for foreign direct investment, partly due to a shift in mindset with regard to FDI among China’s top leadership.

That is, in the past China would take as much FDI as it could get; today, foreign firms presumably need China’s markets much more than China needs FDI, Johnson explains. “It suggests that the Chinese government sees tremendous headroom to push foreign companies to make concessions, and we are seeing this across a whole range of sectors.”

“It doesn’t mean it is time to leave the Chinese market, and there is still tremendous opportunity there,” he stresses. “But it is important for firms thinking about investment in China to go in with their eyes open and to understand China’s ambitions. It is about designing a strategy whereby you seek to maximize your opportunity. It is also about understanding China’s domestic challenges during this transition and aligning with China’s policy direction.”

Domestic politics

Since China’s economic reform and open-door policy initiated by Deng Xiaoping in the 1970s, Chinese leaders – except in extreme circumstances where they thought the regime was threatened – had generally been guided by a sense of pragmatism with a focus on economic growth and development. It is a protocol superseded decidedly in the current era, Johnson believes. “Politics are starting to displace that traditional pragmatism.”

“President Xi is a traditional Chinese leader and is very much someone who thinks about the kind of classic axiom in Chinese politics – which is people first and then policy,” he suggests. “He has a definitive plan for what he would like to see coming out of the Party Congress, making sure he has control over the incoming Politburo, especially the 7-member Standing Committee of the Politburo.”

Recent public events have also implied a level of feud among Chinese policymakers. “What I find striking is that two major meetings – Central Financial Work Conference and Central Economic Work Conference – did not occur over the summer. And it tells us there is a lot of disagreement on policy behind the scene,” Johnson notes. “Traditionally, Chinese leaders tended to project an image of unity, no matter how much they disagree internally.”

“This plays to President Xi’s political strategy where he can push very aggressively, and it largely seems to be working,” he explains. “President Xi’s anti-corruption campaign continues to roll along, largely without slowing down. We can expect to see this continue through the next Party Congress. My sense is that if he gets his way, he will in effect rebuff a lot of the so-called norms or rules that they have been following in the past cycles of [leadership] turnover.”

“Typically, we would expect a successor to be identified at the mid-cycle Party Congress during a leader’s ten-year tenure, but it might not happen next year,” he says. “It doesn’t mean he’ll declare himself king for life; it just means that in the second half of his tenure he feels he’ll need as much power as he can get to deliver on the agenda which came out in the Third Plenum in 2013.”

Secondly, President Xi will likely take the initiative to adjust either the current size or composition of the Standing Committee of the Politburo, Johnson expects. “We could see him make some effort to beef up other party bodies such as the secretariats and bring some new blood for the Party Congress in 2022 where he may or may not stay as General Secretary. I certainly don’t think he has made that decision, but this is putting a lot of pressure on the system.”

Foreign policy

Contrary to keeping a low-profile internationally while focusing on domestic affairs, China has taken a more hawkish stance in recent years when it comes to foreign policy, particularly with its neighboring countries. “And now we have this greater emphasis on activism, despite some confusion with regard to how they are supposed to be active internationally,” Johnson points out. “But I do think we’ve seen a lot of changes in their behavior, and depending on how you look at it, this can be seen as having backfired.”

s can be seen as having backfired.” It is often suggested that China’s relations with its immediate neighbors are currently worse than they were in previous years, he notes. “The heavy push into the South China Sea and some of the other policies seemed to have irritated both those relationships and increased the demand for US security presence in the region. But it is a little too early to assess the effectiveness of this policy.”

“The reality is that what was controlled by the Philippines prior to 2012 is now controlled by China, and there were no consequences of any kind. They are trying to create maritime strategic depth, and they are sending a message to the region and to the US that they intend to operate in these areas with their military at times of their choosing. They have been very successful with a strategy whereby they walk right up to the line triggering some kind of formal US response, but then they know where to stop.”

“This is going to be a huge challenge for the next US president because at the end of the day senior US officials have to make decisions whether we’d go to go to war with a nuclear power over some rocks,” he adds. “If the US wants to dissuade Chinese policy in that direction, it may have to start thinking asymmetrically about policy responses and about different areas in which we might want to signal our displeasure with China.”

China’s relationship with the US, while challenging at times, has been reasonably good in the past few years, Johnson believes. “The Obama administration deserves a lot of credit for the collaborative efforts with China on many global issues. My own concern is that the underlying tensions in the relationship are now shifting from the security issues to the economic issues. Disputes over market access are going to be a real focus and will come to the fore rather quickly.”

“The impending disaster on TPP creates real problems for US influence out here in Asia,” he cautions. “And it is not looking good. In many ways, it will be the biggest gift the US could possibly give to China in terms of the propaganda that the US is about military and stirring up trouble in the region instead of global trade and economic growth.”

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