In a recent op-ed, I wrote how the controversy over Disney’s Mulan embodies some of the ethical dilemmas and pitfalls that face companies doing business in China. On one hand, to maintain their presence in China these companies must comply with the demands and expectations of the Chinese Communist Party (CCP). On the other hand, doing so comes with the cost of significant reputational risk at home.
But the influence Beijing seeks to gain on Western media companies such as Disney and Comcast is but a subplot in a much larger story, and China is playing a series of bigger games in which its Communist Party is thinking a dozen moves ahead of their chief opponent — the United States. Since China’s path to victory over the United States will depend in large part on our ignorance the what games it plays and the strategies it employs, the U.S. must quickly become privy to both to stand a chance.
Though the strategic game of choice in much of the world is chess, in China it is wei qi. China is employing a comprehensive strategy to encircle us across many domains of competition. The CCP knows it cannot win a kinetic war with the United States and so it is finding other ways to fight the hundred years’ war against the United States. And among those ways is using our short-term thinking, our hunger for market opportunities (aka greed), and our openness against us.
1. China’s Most Dangerous Game
To understand China’s game, it helps to studying their primary tactic at the moment, which involves aggressively opening their financial markets to the U.S. in ways they never have before, and China is doing this despite tense political relations between the two nations. Just in the last few months, China has given approval to leading Wall Street firms like BlackRock, Vanguard, Citigroup, and JPMorgan Chase, to expand their businesses in China. In August, BlackRock received official approval from the Chinese government to set up a mutual fund business in Shanghai. Days later, Vanguard announced it was moving its regional headquarters to Shanghai. JPMorgan Chase, meanwhile, is set to pay $1 billion to become the first foreign company to assume full ownership of a pre-existing Chinese mutual fund business. This is all in marked contrast to Beijing’s previous requirement that Western firms partner with local Chinese entities to do business in China’s financial markets.
Why is China opening up their financial markets and why now? China is not doing this because it needs the money. Part of the reason it is doing this is because it wants to study Western banking models. There are numerous examples of China bringing in Western companies and letting them make money in China but essentially forcing them to teach Chinese companies that are positioning themselves to set up competing enterprises that will eventually destroy the China opportunities for these very same Western companies. When a Western company fights back via the legal system, as the Dallas-based Tang Energy Group has done against the state-owned Aviation Industry Corporation of China (AVIC), they find China to be a formidable opponent even when fighting on home turf.
If you study China’s past collaborations with the West in other industries—its partnerships with Disney and Comcast being notable examples—a pattern comes into focus. Essentially, what Beijing is doing is laying down the foundations for an ecosystem set up to extract commitments and support for their policies from Western companies. This ecosystem consists of numerous interlinking components, including the social credit ranking system, the national security law, and cybersecurity laws. With these components now in place, the CCP is inviting into China an increasing number of Western companies from varying industries, most of which will not be able to resist the prospect of tapping into what is now the world’s largest economy.
For its part, the CCP is not interested in providing access to its markets without getting something in return and what it wants most of all, is for foreign financial institutions to favorably represent and support their nationalist narratives and policies back home in the United States. U.S. banks and financial companies are the perfect vehicle for Beijing to achieve these aims since the financial sector has tremendous lobbying power in Washington and is by far the largest source of campaign donations to political parties and candidates.
This is not just an abstract hypothetical. China has already done this, very recently in fact with Standard Chartered and HSBC, two British banks with operations in Hong Kong and the mainland. Beijing gave the ultimatum to these two British banks that if they did not publicly express support for the national security law in Hong Kong they would lose the right to continue doing business in China. Both banks complied in a move widely criticized by the international community. But the CCP didn’t stop there; it also demanded both companies crack down on clients with ties to the pro-democracy movement in Hong Kong. The banks complied with this as well.
Another more recent example is the CCP abruptly slamming the brakes on Ant Group’s highly anticipated IPO, just days before its shares were set to begin trading in Shanghai and Hong Kong on Nov. 5, costing the company tens of billions of dollars. This came just over one week after Ant Group co-founder Jack Ma criticized Chinese regulators for stifling innovation with a “pawnshop mentality.” The CCP shut down this IPO and then disappeared Jack Ma as retaliation and as a reminder that the CCP controls all private industry in China. Duly chastened, Ant Group publicly pledged to “embrace regulation“, but Jack Ma has not been seen nor heard from for going on a month now.
These are tactics China has been before and will use again with the foreign banks and financial institutions rushing in now.
2. Why Companies Comply With China’s Demands
Why do Western companies not just refuse to comply when China makes these kinds of demands? Why would they support policies that so clearly run counter to the democratic principles of their home countries?
First, as part of the contractual conditions for doing business in China, the Communist Party requires foreign companies to not say or do anything disruptive to the stability of China’s social fabric. What is considered “disruptive,” however, is deliberately left ambiguous and open to the CCP’s arbitrary interpretations. Companies that violate this rule may not only lose their right to operate in China, they may also be required to forfeit the intellectual property they brought with them. To illustrate, if the CCP were to disapprove of something Disney said, Disney might not only be forbidden to release any future films in China, their highly profitable Shanghai Disneyland and other joint ventures would thereafter belong entirely to their government-owned Chinese business partners. This is likely why Disney has been slow to answer questions from U.S. or U.K. lawmakers about their involvement with Xinjiang, or answered those questions in only the vaguest terms. They do not wish to provoke CCP ire.
Of course, Western companies could always just say “no” to the CCP’s demands, or they could conclusively prove their commitment to their home countries and democratic principles by being willing to sever their ties with China. The reason they do not do this is simple: once these companies have invested resources to establish their presence in China, and particularly once they are generating profits in China, they have too much to lose.
But why would Western firms agree to such contractual terms in the first place? For the same reasons they comply when the CCP makes its demands: money. The prospect of tapping into the world’s largest economy is too enticing for companies to pass up. Perhaps corporate America’s proclivity to focus on short-term profits blinds companies to the very real risks of making deals with China. Or perhaps they do not believe China would actually try to manipulate them in such a way (though it is clear from the examples of Standard Chartered and HSBC that China very much would). These companies also may ultimately be agnostic about the countries and the principles to which they are loyal. But for whatever permutation of reasons, foreign banks right now are happily walking into the honeytrap the CCP has set for them. Insidious as all of this is, one cannot help but marvel at the strategic genius of using our own short-term thinking against us. As I often say, China looks miles down the road; we look inches down the road.
3. Why This Matters for the American People
From tech to fashion to the media, Western industries are becoming increasingly complicit in China’s manifold human rights violations. I fear banks soon will be as well, but there are two bases for cautious optimism. One is the bipartisan support in Washington for sanctions against China for its human rights abuses. If enough political momentum can be built before China exercises its influence over American banks and their lobbying power, this could prevent serious problems down the road. However, there would need to be an international effort on this because the U.S. cannot deter China alone. Though the Republicans have sought to frame Joe Biden as being China’s choice, the reality is that Biden is not only a China hawk, he also has the diplomatic dexterity to bring world leaders back to the U.S.’s side for a concerted effort.
The other source of hope lies with U.S. citizens becoming increasingly aware of China’s game plan and articulating their concerns through their purchasing patterns. The banks need to understand that we know they have choices in this matter, and that the best choices would be those that are loyal to U.S. interests. Activist-led movements like the recent call to boycott Disney’s Mulan raise the likelihood that Americans will become more concerned about these issues. The challenge here is that the Covid-19 pandemic and ensuing economic crisis in America have created an atmosphere of self-preservation, and this has emboldened China to push harder and faster to take their plan to the next stage.
We the people can and should become more active players by bringing China’s nationalist agenda to the center of the national discussion — not at the expense of the other issues we care so deeply about—the economy, the coronavirus, the preservation of democracy — but precisely in the name of them.
This post was guest written by David Jacobson. David is an international lawyer who provides strategic litigation support and expert witness services for law firms in cases involving Chinese SOEs and SOE Governance. He is also a professor of law and global business strategy at SMU’s Cox School of Business.