The vanishing allure of doing business in China

IT IS NOTHING new for foreign firms to endure shakedowns by the Chinese Communist Party. As far back as revolutionary times, Chairman Mao’s victorious troops did not directly confiscate foreign-owned assets as their Bolshevik forerunners had done in Russia. Instead, they wore them down with higher taxes and fines so big that eventually companies gave away their assets for nothing. In one memorable case dug up by Aron Shai, an Israeli academic, a British industrialist in 1954 professed to be handing over everything to the Communists from “large blocks of godowns (warehouses) down to pencils and paper”. And yet, he complained, Comrade Ho, his opposite number, continued to haggle “like a pre-liberation shopkeeper”.

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Though multinationals have flocked back to China since, the government’s nit-picking has continued, encompassing everything from technology transfer to how freely firms can invest. There have been big improvements, but the pettifoggery is a constant reminder, as one American puts it, that companies should not get “too big for their britches”. Western firms operate in China on sufferance and one day the country may seek to replace them.

As a result, some may have felt a sense of Schadenfreude that Chinese firms, not Western ones, have been the main victims of President Xi Jinping’s recent effort to socially engineer a new type of economy. In the past week alone the government has taken steps to reduce barriers between tech giants Alibaba and Tencent, and, according to the Financial Times, ordered the break-up of Alipay, a financial super-app owned by Alibaba’s sister company, Ant. Some go so far as to draw flattering comparisons between Mr Xi’s efforts to emasculate China’s tech “oligarchs” and the way governments in America and Europe are going after Western tech giants.

The heavy-handedness, though, is chilling to an unusual degree. So is the capriciousness. Kenneth Jarrett, a veteran China watcher in Shanghai for the Albright Stonebridge Group, a consultancy, says the question on everyone’s lips is “who might be next?” The crackdowns occur against the backdrop of rising tensions between China and the West that leave multinationals stranded in a sort of semilegal limbo. For many the lure of China remains irresistible. But the perils are catching up with the promise.

Besides banks and asset managers, some of whose investments in China have taken a big hit in recent months, several types of multinational firm are at risk. One group includes those that make most of their money in China from pandering to a gilded elite who flaunt their $3,000 handbags and sports cars. Another encompasses companies that irritate their customers for what can be construed as Western arrogance; Tesla, the electric carmaker, is an example. A third category includes European and American makers of advanced manufacturing equipment and medical devices that China feels it should be producing itself.

As usual, the threats come in the form of policy announcements that sound deceptively bland. One, “common prosperity”, is a catchall phrase extending from a reduction in social inequality to more coddling of workers and customers to the nannying of overstressed youngsters. Its most obvious impact is on Chinese tech, tutoring and gaming firms, which have lost hundreds of billions of dollars in market value as a result of government crackdowns. Yet multinationals, too, have been caught in the fallout. In a few days in August the valuation of European luxury brands, such as Kering, purveyor of Gucci handbags, and LVMH, seller of baubles and bubbles, tumbled by $75bn after investors finally took Mr Xi’s common-prosperity agenda seriously.