China’s real policy to Western SME investors
The new China espionage rule that has people riled up. There are warnings and anxieties.
Is it a draconian, arbitrary measure that gives unchecked power to the shadowiest elements of the CCP and Chinese government? Sure. It’s another one in a long, long list. If you’re involved in China trade, there’s a good chance that at some point you met someone who tried to tell you about other incidents of unchecked power seized, shadowy elements, risk to international investors and such, and you politely drifted away to talk to someone more interesting. It happens on a pretty regular basis.
Let’s make the simple part simple.
There’s a good chance your once-thriving China operation is no longer viable. The economics of manufacturing in China were shifting before Covid in ways that were manageable by many but not all foreign invested firms. The state of trade relations between the US and China in July 2023, however, creates new layers of compliance costs, transactional risks, and brand danger.
Put another way: The China business model that worked from 2006 through 2018 may not work anymore.
You are not welcome anymore.
- Not needed.
- This is a princeling admin. You’re not getting Musk-level assurances of anything.
- You make great collateral damage.
- Once you start kowtowing, it doesn’t stop.
- The CCP loooooves the US media coverage. The Russians have Tucker, CCP has Reuters and NPR, of all people.
- You’re not needed. I don’t know your business, but there’s a good chance your Chinese partners, suppliers, and regulators do. Not only have they seen behind the curtain, but they’ve got schematics of your control center and a prototype of the balloon.
- It’s a Princeling world in Beijing. Xi Jinping is a “princeling” or CCP royalty. He has been surrounding himself with other princelings in this reconstituted Imperial China. He will make time for major leaders, and he will make deals with the likes of Musk and Gates. But in the CCP, some enterprises are more equal than others. Assurances offered to Fortune 100 mean little to front-line entrepreneurs.
- You make great collateral damage. The Chinese won’t sweep through business centers hassling foreign invested firms. That’s inefficient and distasteful. Better to make an example of 1, intimidate 20 with “invitations to tea”, and then let the market suppress itself. It works. In the meantime, your local managers won’t step out of line for fear of being made an example of. Of course, there’s an expression for this: “kill a chicken to scare the monkeys”.
- Compliance is a never-ending road. Once you give in to little things, you are tacitly agreeing to comply forever. That’s why this new regulation sounds so much like a repackaging of past rules. Party control of enterprises has never really been up for debate in China, and this new rule doesn’t change the equation one bit. Foreign operations in China have already agreed to all of this, in one form or another.
- The CCP is expert at propaganda/media, and this kind of thing is a bonus for them. The Chinese are notoriously bad at positive soft power projection, but when it comes to intimidation, they are in their zone. We are hearing two diametrically opposed messages/comments out of Beijing — a conciliatory, inclusive message for those it considers useful, and much harsher warnings for those already in the fold.
Final Word:
Should you be worried? Yes.
Should you have been worried for the last 20 years, when this all started? Yeah, sure. But the point is that nothing has changed.
One of the tenets of risk analysis is that if you identify two conflicting trends or datasets, use the one that is less advantageous. Repackaged warnings about the primacy of the Party and the need for compliance are the CCP’s “love language,” or real communication style. They’re nervous, and this is them laying the groundwork for new state actions.
You’ve been warned.