How China's Reforms Are Pushing Away Foreign Business

Closed Door Policy: How China’s Reforms Are Pushing Away Foreign Business

September 23, 2014 Joshua Eisenman Foreign Affairs

Related Categories: China

"We shall proceed with reform and opening up without hesitation," said Chinese President Xi Jinping to his country's top leaders at a symposium last month that marked the 110th birth anniversary of his predecessor Deng Xiaoping. At first glance, his pledge appeared sincere. In the two years since taking office, Xi has consistently advocated a reform agenda intended to continue the economic revitalization and restructuring that Deng started in 1978. Xi’s campaign includes plans to reduce government meddling in the economy by making it easier for private-sector firms to compete with state-owned enterprises (SOEs) and allowing companies and individuals to invest and borrow more freely.

At the same time, however, Beijing has become less open to foreign businesses, subjecting them to costly fines, denying their mergers, refusing their applications for licenses, and detaining and deporting their managers. According to a survey conducted in August this year by the American Chamber of Commerce in China, 60 percent of foreign businesses say they feel less welcome in China, an increase of nearly 20 percent from last year. According to the survey’s results, a growing number of multinational companies feel they “are under selective and subjective enforcement by Chinese government agencies.” Roughly half of those surveyed said that foreign firms were being singled out in Beijing’s anti-corruption investigations. And the market has responded: In August, foreign direct investment into China fell by 14 percent from the previous year, following a 17 percent drop in July.

All of this feels familiar. Chinese economic reforms have long come with resistance to foreign business. Indeed, Deng Xiaoping’s market reforms were forged amid a decade-long political battle that pitted radical reformers against powerful entrenched interests. In 1983, for example, senior conservative leaders Chen Yun and Deng Liqun launched a campaign against “spiritual pollution” from abroad. Deng’s reforms were accepted only after his now-famous Southern Tour of China in 1992, during which he generated widespread local support for opening China’s markets to foreign competition. By using his bully pulpit to draw public attention to the benefits of foreign investment for China’s development, Deng silenced critics of greater external involvement in China’s economic affairs.

In 2010, Liu He, Xi’s chief economic advisor, argued that China should sustain such openness. “Domestic drive often needs to be activated by external pressure,” Liu said in an interview with Chinese magazine Caixin. “From the perspective of China’s long history, a unified domestic drive and external pressure has been key to success.”

Now, as then, Xi’s efforts to make the economy more market-oriented have been stymied by a web of central government ministries, provincial and local governments, powerful families, and SOEs that seek to enrich themselves at the public’s expense. This time, however, China’s leaders have not called for more foreign competition in the domestic market, and Xi himself has not stressed the importance of bringing outside pressure to bear on China’s SOEs. Instead, he called for a strengthening of SOEs this March and in 2009 praised them as an “important foundation of Communist Party rule.”

Viewed in isolation, Xi’s comments might be dismissed as mere rhetoric. In this case, however, they have been accompanied by an increasingly hostile climate for foreign firms, with multinational companies regularly excoriated in the Chinese official press and their executives and managers routinely detained by provincial agencies. High-profile firms targeted by Chinese regulators include Audi, Coca-Cola, Mercedes-Benz, Microsoft, OSI Foods, Qualcomm, and Wal-Mart. In August, Chinese officials found a dozen Japanese auto parts makers guilty of price fixing and slapped them with the highest antitrust fines in the country’s history, roughly $200 million. And last week, after a one-day trial held behind closed doors, British pharmaceutical maker GlaxoSmithKline was fined a record $489 million for bribery. Taken together, these actions reflect a “transformation in the country’s strategic thinking,” as Wang Jisi, Dean of the School of International Studies at Peking University, wrote in the March/April 2011 issue of Foreign Affairs. China appears to be focusing on sustaining “the country’s high growth rate by propping up domestic consumption and reducing over the long term the country’s dependence on exports and foreign investment,” Wang observed.

The U.S.-China economic relationship has long facilitated and buttressed the political one; now, however, the tense economic climate threatens to damage the bilateral relationship. For decades, optimistic American firms supported expanding U.S. engagement with China based on their confidence in the security of their investments and hopes for profit in the Chinese market. But as U.S. firms in China feel increasingly vulnerable, they will likely become less willing to publicly support China-friendly policies in Washington. Moreover, some vested interests that Xi has sought to break up -- unscrupulous food producers in Shanghai, for example -- appear to have used the crackdown on foreign firms -- the U.S.-based OSI Group, in this case -- to distract public attention away from their own malfeasance. If Xi cannot hold such domestic interests accountable, his reforms cannot succeed. And if reforms are so blunted, Beijing will need to rely more on a well-publicized party purification campaign that employs increasingly repressive administrative and legal controls to enforce its agenda.

China’s current strategy -- economic reform without opening up -- will, over time, provoke increasing levels of resentment, if not outright opposition, from local party members and firms as well as foreign businesses and governments that feel unreasonably constrained. In pursuing such an approach, China’s leaders would do well to recall the old Chinese proverb: “On top there are policies, below there is pushback.”