Is Xi a Threat to Foreign Businesses in China? - Bloomberg

Is Xi a Threat to Foreign Businesses in China?

Multinationals say they feel less welcome in the world’s second-biggest economy.

Peter Martin and Keith Zhai

On Oct. 18, 2,300 hand-picked delegates from China’s ministries, provinces, the military, and state-owned and private companies will file into Beijing’s Great Hall of the People for the start of the 19th National Congress of the Communist Party. The weeklong event is a highly choreographed, twice-in-a decade shuffling of China’s political deck. More than half of the top leadership is likely to be replaced, including as many as five of the seven members of the all-powerful Politburo Standing Committee—a subject of furious speculation in the runup to the Congress. What’s already a foregone conclusion is that President Xi Jinping will go on to serve a second five-year term and will in all likelihood emerge from the ritual even more powerful than he already is.

Foreign businesses may not find this an appealing prospect. It’s true China’s president talks a great deal about openness. One of his first acts in office was to reenact Deng Xiaoping’s “Southern Tour,” which reignited market reforms in the early 1990s. Policies announced at the Third Plenum in 2013 promised a “decisive” role for market forces. And while his U.S. counterpart, Donald Trump, has disparaged globalists, Xi embraces the label. In a speech at this year’s annual meeting of the World Economic Forum in Davos, he said choosing protectionism was akin to “locking yourself in a dark room.”

But Xi’s rhetoric doesn’t square with reality, multinationals say. In a January survey of 462 U.S. companies by the American Chamber of Commerce in China, 81 percent said they felt less welcome in China, while more than 60 percent have little or no confidence the country will further open its markets in the next three years. The sentiment is echoed by the president of the European Union Chamber of Commerce in Beijing, Mats Harborn, who says his members are suffering from “promise fatigue.” Says Harborn: “As business and investment decisions can’t be based on promises, we now need to see encouraging words turned into concrete market-opening actions.”

Indeed, despite all of Xi’s talk of reform, China still ranks 59th out of the 62 countries evaluated by the Organization for Economic Cooperation and Development in terms of openness to foreign direct investment. At the same time, FDI is becoming less important to the economy: In 2016 it accounted for a little more than 1 percent of China’s gross domestic product, down from around 2.3 percent in 2006 and 4.8 percent in 1996.

“The Chinese leadership as a whole … has been conscious about pacing reform and opening”

During Xi’s first years in office, several foreign companies became targets of his anticorruption campaign as well as stepped-up enforcement of antitrust laws. Makers of baby formula including Abbott Laboratories, Danone, and Mead Johnson Nutrition were hit with a collective $110 million in fines in 2013 for allegedly colluding to keep prices high. An investigation into British pharmaceutical giant GlaxoSmithKline Plc for “serious economic crimes” including bribery culminated in an almost $500 million fine in September 2014. (In a statement at the time the company said it would pay the penalty and make changes to its business practices to remedy flaws cited by Chinese authorities.)

An even bigger cause for concern for multinationals are Beijing’s plans to replicate foreign technologies and foster national champions that can take them global. A program launched in 2015 called Made in China 2025 aims to make the country competitive within a decade in 10 industries, including aircraft, new energy vehicles, and biotechnology. U.S. Commerce Secretary Wilbur Ross has described the plan as an “attack” on “American genius.”

During a trip to China last month, Ross zeroed in on Beijing’s efforts to boost the share of domestically made robots in China to more than 50 percent of total sales by 2020, from 31 percent last year. To reach that target, the government is offering subsidies, low-interest loans, tax waivers, and rent-free land to makers of robots as well as businesses that buy them. Chinese companies such as E-Deodar Robot Equipment, Siasun Robot & Automation, and Anhui Efort Intelligent Equipment aspire to become multinationals, challenging the likes of Switzerland’s ABB Robotics and Japan’s Fanuc for leadership in the $11 billion market.

How Xi Jinping Went From Feeding Pigs to Ruling China

How Xi Jinping Went From Feeding Pigs to Ruling China

Under Xi, China has also redoubled efforts to build its own semiconductor industry. The country buys about 59 percent of the chips sold around the world, but in-country manufacturers account for only 16.2 percent of the industry’s global sales revenue, according to PwC. To rectify that, Made in China 2025 earmarks $150 billion in spending over 10 years. A January 2017 report by the U.S. President’s Council of Advisors on Science and Technology detailed China’s extensive subsidies to its chipmakers, mandates for domestic companies to buy only from local suppliers, and requirements that American companies transfer technology to China in return for access to its market, all of which add up to a natural security threat, it said. “It has been official Chinese policy for decades to seek the transfer of foreign technology, to establish domestic champions and to eventually displace foreign competitors,” says Jeff Moon, who stepped down as assistant U.S. trade representative for China affairs in January. “Xi has injected more nationalism and more vigor into those long-standing efforts and taken them to a more sophisticated level.”

Xi’s policies tread a well-worn path laid down by his predecessors. In the mid-2000s, the country set its sights on developing large, advanced nuclear reactors. State-owned enterprises including China General Nuclear Power Corp. and China National Nuclear Corp. assimilated Western technologies—sometimes with cooperation and sometimes not—and are now engaged in projects in Argentina, Kenya, Pakistan, and the U.K. Westinghouse Electric Co. supplied more than 75,000 documents detailing its nuclear technology to China’s State Nuclear Power Technology Co. in 2010 as part of a bid to build four reactors. In 2014 the U.S. government charged five Chinese military officials with hacking American companies including Westinghouse to steal information that would give their Chinese competitors an edge.

Some China hands say Xi hasn’t been more friendly to foreign business because he spent most of his first term focused on politics. In China, presidents are anointed, not elected. Deprived of a popular mandate, they must solidify their hold over the apparatus of power to advance their agenda. The anticorruption campaign Xi unleashed after coming to power in 2012 has ensnared some 1 million officials and sidelined many of his would-be rivals. He’s also overseen the largest overhaul of the military since the 1950s, decommissioning some 300,000 troops. “Usually when people come into office, nothing happens in the first year or two,” says Sidney Rittenberg, an American journalist who joined Mao Zedong’s revolution and for years served as his translator. “This guy came out of his corner like a boxer with a fury of punches.” Rittenberg says Xi has “still got to break the resistance to big economic reforms,” including restructuring or shutting down the 98 remaining state-owned enterprises operated by the central government. “They haven’t made much headway in terms of that at all.”

John Thornton, who helped build Goldman Sachs Group Inc.’s business in China in the 1990s and is now executive chairman of Barrick Gold Corp., says China’s policymakers have long worried that liberalizing too quickly might open the economy to foreign domination. “For the last 20 years, maybe even longer, the Chinese leadership as a whole, and this would include the current leadership, has been conscious about pacing reform and opening,” he says. What’s changed is that while U.S. policymakers were once comfortable allowing China that rein, today they’re more inclined to push back, Thornton says.

Sensing jitters, China’s leadership has tried to reassure foreign companies. In January, Xi’s cabinet released a policy known as “Document No. 5” that promises to expand access to the service, manufacturing, and mining sectors. The government has also said it’s considering easing restrictions in the civil aviation industry. Changes to regulations governing the insurance and auto industries, where caps on foreign ownership make joint ventures a necessity, may also be in the works.

Nevertheless, multinationals would do well to temper their expectations, says Gao Zhikai, who was an investment banker with Morgan Stanley and its joint venture China International Capital Corp. In the 1990s, China relied on foreign businesses not only for investment, but also technical and management know-how. Today, “foreign companies are less attractive to China, because they don’t have many things that China doesn’t have,” says Gao, who was involved in some landmark reforms, including taking China Mobile Ltd. public in 1997. “China is one of the world’s largest countries looking at population size, Internet users, mobile phone users, and other aspects,” he says. “It is now the time for China to lead global trends.” —With Danielle Bochove

How Xi Jinping Went From Feeding Pigs to Ruling China

BOTTOM LINE - Chinese President Xi’s quest to create national champions in industries such as semiconductors and robotics presents a clear threat to Western companies.