China’s Regime is Coming to a Company Near You
After the Swedish retailer H&M announced recently that it was concerned about the use of forced labor to produce cotton in China’s western region of Xinjiang, the company faced a boycott in the country. H&M was pulled from a major e-commerce site and blocked by leading search engines. Similarly, Nike, Adidas, Burberry, and New Balance, who expressed similar concerns as part of the Better Cotton Initiative (BCI), were criticized in the People Daily (the Communist Party official paper), which called for a boycott of these brands.
As ominous as these stories sound, the situation is going to get a lot more dire. China is about to introduce a more stringent social controls system that many in the West will find objectionable. Moreover, the system’s impact may be felt beyond China’s borders.
Automatic convictions behind closed doors
As reported in the media, the Chinese Social Credit System maintains a record of every citizen, tying facial recognition, creditworthiness, and social behavior to each person’s identity number. If, for example, a person is caught jaywalking, not paying a court fine, or playing music too loud in a public place, “social points” are deducted from his or her account. Naturally, identifying offenses such a jaywalking is accomplished by facial recognition and can be automatic. Convictions for other transgressions involve police action and/or information from informants.
When a person’s social rating falls below a certain level, he or she is disqualified from travel by air or on certain train lines and cannot buy property or take out a loan. Moreover, if victims criticize the regime, they will fall foul of China’s political regulations and be penalized with further credit deductions. Unfortunately, since there is no judicial process involved, these cases go unreported and are very difficult to contest.
The next step: corporate controls
The Chinese authorities are now in the process of completing such a system for companies. For example, a company may be awarded 1,000 credit points, allocated to different aspects of its “character” as follows:
Companies with excellent credit (>800) may have access to buildings, public resources, fewer inspections, fast-track treatment, fiscal fund support, tax refunds, etc. Companies with low scores may be sanctioned and even black-listed.
Disturbingly, China can use the system to serve its political objectives. In 2018 the Chinese authorities demanded that airlines not refer to Taiwan as a non-Chinese territory. China considers Taiwan as a Chinese province. Delta, United, and American Airlines bowed to the demand and changed their websites so Taipei, Taiwan’s capital, is not listed as being located in Taiwan. All 44 international airlines contacted by the Chinese authorities about the matter complied with the demand.
In another example of China using its market size for political purposes, the Chinese Basketball Association suspended all cooperation with the Houston Rockets in 2019. The reason was that a player, Daryl Morey, tweeted his support for the Hong Kong protesters. Given the popularity of the NBA in China and the amount of money involved, the NBA and the Rockets apologized and forced Morey to do the same.
Are we prepared for worse?
While these cases are not frequent, the new corporate social credit system means that the use of Chinese market power can be automated and systematized. Consequently, high-ranking employees and officers of multinational companies may be required to comply with Chinese laws even when they are not physically in China. These executives and their companies may be subject to deductions of their social credits. The follow-up punishment could impact executives’ personal travel in and out of China and their companies’ ability to do business in the country. In effect, the system may prevent them from expressing opinions or disseminating information related to China or other issues which the Chinese Government finds offensive or disagreeable.
The supply chain angle
The debate in the Western media over whether companies will or will not leave China misses a crucial point. China wants Western companies to remain in China and to base their plants and suppliers in the country. In fact, China may continue to give inducements to companies that invest in facilities located in less developed parts of the country, such as inland areas. One reason for this is economic — more foreign direct investment and more procurement in China leads to more exports which are the engine of China’s economy.
A more important reason may be political. The Chinese regime understands that, unlike in China, corporations in the West influence government policy. Furthermore, Western corporations have objectives that are different and distinct from the political goals of their governments. As Western governments criticize China and even consider sanctions, China looks to the armies of corporate lobbyists to pressure such governments to reconsider. And this can take place only if supply chains remain dependent on China.
An inkling of this trend is already evident in Germany’s latest trade deal with China, signed at the end of 2020. China is the biggest market for German goods, and German industry has pushed hard for the deal, despite reservations in the US and the rest of Europe.
The tension between Western values and the profit drive of Western corporations that want to conduct business in China can create a cultural conflict at home. In such an environment, companies will be free to criticize Western institutions and governments but will not dare criticize the Chinese Government. For example, Delta Airlines, one of the companies that succumbed to Chinese pressure regarding Taiwan, feels free to criticize the state government of Georgia in the US about its election laws. Such behavior can be more damaging to companies beyond creating tensions with Western governments. It can strain relationships between management and employees, and with customers and the communities these companies operate in.
Western companies and the societies in which they are rooted need to consider these conflicts. Better to decide on a response now and be prepared for the potential consequences.
